With the Bank of Canada shifting from dovish into neutral territory and oil prices breaking out, we’ve been bullish on the Canadian dollar since last week’s big breakdown in USDCAD (see “USDCAD Finally Breaks Down – Could 1.20 Be Next?” for more), but the Loonie has actually been showing strength against the other currencies for a couple of weeks now. For instance, GBPCAD peaked above 1.9500 back in mid-February and has been trending consistently lower since then. Though many traders don’t follow this pair closely, it is showing one of the cleanest medium-term technical trends in the entire forex market.
Yesterday’s GBPCAD rally stalled out exactly where you’d expect: at converging resistance from the top of the bearish channel and previous-support-turned-resistance at 1.8475. Meanwhile, the secondary indicators also favor the bears, with the MACD trending lower below both its signal line and the “0” level and the RSI in its own corresponding bearish channel. We often discuss the importance of watching for a breakout in a secondary indicator as a leading indicator for price, but in this case, even a upward break in RSI wouldn’t necessary warn of an imminent turn higher in GBPCAD because RSI is a bounded oscillator. By definition, a trend can’t continue forever in an oscillator that’s limited to a 0-100 range, so instead, traders might want to wait for a move above the 50-60 resistance in the RSI before concluding that the downtrend is necessarily coming to an end.
To the downside, bears may look to target the confluence of previous support and the 78.6% Fibonacci retracement around 1.80 next, with the potential for a move down toward 1.7760 if that level gives way. Conversely, a break above this week’s high at 1.8475 would suggest a more substantial rally toward 1.8700 is in play.
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