USDCAD: Has the tide changed?

The Canadian dollar came under pressure at the end of last week after some dismal domestic labour market data was pounced on by the market. USDCAD made its most bullish close for 4-months, and, crucially, managed to stay above trend-line support at 1.07.

So what now? There are a few technical reasons to suggest that USDCAD may resume its bullish trend in the coming days:

• A Morningstar candlestick pattern on the weekly chart. This pattern is often considered a sign of a reversal. In the first candle the bears are in charge, and price usually breaks to new lows. The second candle is usually small, suggesting that the bears are not willing to push the price to new lows. The third candle is the most significant, if the bulls are able to claw back some losses, this can be a sign that the trend is changing.

• While USDCAD’s Morningstar pattern is not the most perfect example of this pattern (for example the second candle is negative, and the third candle did not eliminate all of the losses seen in week 1), it is a signal that USDCAD’s period of weakness could be coming to a close.

• Last week’s CFTC data showed that long positions in the CAD vs. the USD had risen to their highest level since February 2013, which suggests that long CAD positions are at extreme lengths, which could trigger a reversal.

• From a technical perspective, we now need to see a daily close above 1.0751 – the 38.2% Fib retracement of the June – July decline - for USDCAD to have a stab at a prolonged recovery phase. If this happens, then the next resistance to note is 1.0831, the 61.8% retracement of the same move.

The fundamental outlook:

At FOREX.com we always like to look at a trade from both technical and fundamental angles, and while the technical picture looks strong for USDCAD, the fundamental picture is more nuanced, for a couple of reasons:

Firstly, although the headline figure for the Canadian labour market data was weak, 9.4k jobs were lost last month, the job losses were mostly part time, with full time jobs, which are considered more valuable, actually rising by 33.5k. Thus, the CAD may not tank on this data point alone, which makes Wednesday’s Bank of Canada decision and statement critical for the short-term direction of USDCAD, in our view.

Secondly, Fed chairwoman Janet Yellen is testifying to Congress this week. If she does not shift from her dovish stance and reinforces her view that rates will stay low for some time and recent inflation pressure is just noise, then we could see the dollar struggle to gain traction. The dollar is not performing well on a broad basis and Treasury yields have given back recent gains, which could hinder a recovery in USDCAD.

Conclusion:

When the technical and fundamental picture does not match it is worth taking stock of a currency pair before diving straight in. While we think that USDCAD has made some powerful reversal signals, and a resumption of the bullish trend could be on the cards, a dovish Janet Yellen could scupper the greenback’s chances of a recovery. Thus, we would urge USDCAD bulls not to get too excited about a recovery until we see a daily close above 1.0751, which could open the door to 1.0830 and above.