USDCAD: Eventually, Gravity Wins

There were many casualties in the run-up to the European Central Bank’s decision to introduce Quantitative Easing, and those casualties beget other casualties as well. The most shocking was the peg pulling disaster by the Swiss National Bank which has shaken the world of currency trading to the core, but other central banks have attempted to soften the blow on their own economies as well. The Bank of Canada is one such bank whom decided to cut interest rates from 1.00% to 0.75% last week, which caught investors off guard, just not to the scale of the SNB. The reaction was pretty brutal as the CAD took it on the chin against virtually every other currency in the developed world, but that reaction is beginning to be lessened as this week has begun.

Part of the reason the CAD is gaining a little more favor lately is that the world is quickly realizing that the BoC may have just been one of the first to act in a long succession of central banks that may very well have to do something dovish to keep up with the currency wars. While the Federal Reserve quit their big pimpin’ ways back in October 2014, the ECB is now the one spendin’ B’s, and the fallout from that decision will reverberate in central bank decisions yet to come; including that of the Fed themselves. The Fed’s statement being released tomorrow could include a few lines highlighting the ECB’s decision and how it might impact their own decision to hike interest rates. If that is the case, the USD may give back some of its recent gains against not only the CAD, but other currencies as well.

Moving on to technical reasons why the USD/CAD is intriguing is simply the scope with which it has moved lately. The USD/CAD started 2015 around 1.16 and has rallied all the way up to nearly 1.25 this morning, taking out a long term rising trend line and breaking out of a widening channel in the process. While the title to this article suggests that “what goes up, must come down” isn’t necessarily true in the world of trading as the laws of physics have no bearing, the psychological laws of attraction may have some merit. In addition, the RSI is heavily overbought, and in the two previous times the 80 level has been hit, the USD/CAD fell nearly 300 pips thereafter.

The combination of previous resistance acting as support, overbought conditions, and a potentially catering Fed means this pair could potentially fall almost 200 pips to the downside and revisit its trend line. As investors prepare for the Fed’s statement tomorrow, watch for even more USD weakness as gravity tries to make its effects felt.

Figure 1: