USD/CAD's Unwind Could Just Be Getting Started
Matt Simpson June 21, 2019 4:04 AM
With a long-term trendline broken and bears clearly bac in control, the inflection point for the year has likely been seen.
With a long-term trendline broken and bears clearly back in control, the inflection point for the year has likely been seen.
Just under two weeks ago, we outlined a case for USD/CAD to challenge long held views and perform a bearish reversal. At the time, it was resting precariously on its 2018 trendline, although the trendline has since broken and bearish momentum is clearly winning the battle.
Trade tensions have continued to thaw ahead of next week’s G20 meeting, rising inflation has dispelled calls for a rate cut and the USD has been under immense pressure following the dovish FOMC meeting this week. Along with rising oil prices, the environment has been favourable for a stronger Canadian dollar, although signs were already there ahead of these moves that bullish pressure could be building for the Canadian dollar.
- Several crosses were turning against CAD around the same time (CAD strength)
- Positioning on CAD has seen a steady decrease of short exposure this year
Since that tweet, both AUD/CAD and NZD/CAD have fallen 2.3%, and the latter has broken to a fresh YTD low. Therefore, we remain bearish on USD/CAD as part of a longer-term reversal.
We can see on the weekly chart that the 2019 high has provided a lower high, ahead of its trendline break. That we’ve also seen the two most bearish weeks this year underscores how the tide has likely turned, following its low volatility rise into the 2019 high.
Switching to the daily chart shows a strong, bearish trend structure is developing.
- Bears could seek to fade into rallies up to the 1.3225/50 resistance zone (as the reward to risk potential on the daily chart is currently undesirable shorts) or seek bearish continuation patterns on lower timeframes.
- Next major support is around the 2019 lows where we’d expect a bout of profit taking (therefor a technical bounce), 1.3113 likely to provide interim support.
- A break above the resistance zone doesn’t invalidate the core bearish bias, we’d feel inclined to step aside until further signs of weakness appears whilst the bearish structure holds.
- As our core view of bearish, we expect the 2019 low to eventually give way. So, hopefully it will provide further opportunity to short for some sizeable moves on the daily charts.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.