EUR/CAD: triple top or breakout? Crude should provide the answer

Crude’s plunge to $30 has been the main reason why the Canadian dollar has been dropping to a fresh decade lows against the US dollar, with the black gold being Canada’s number one commodity export. Today, crude prices swung wildly to the positive territory, probably due to short-covering near the $30 handle, before both contracts fell back viciously to trade only just shy of this technically-important area as we went to press.

The EUR/CAD is among the most interesting charts to watch going forward. If crude oil manages to bounce back from these extremely oversold levels, the Canadian dollar could rally across the board and it will probably outperform against a weaker currency such as the GBP or EUR, as opposed to say a stronger currency like the USD. With both oil contracts arriving at the technically-important $30 area, some people are undoubtedly expecting to see a rebound soon. But will they?

It is interesting to note that the EUR/CAD has so far failed to break its 2015 high of 1.5560, and has found resistance around the 1.5550-1.5600 range three times in as many calendar years. A potential triple top reversal pattern may therefore form here, leading to a significant drop. Supporting the bearish case here is the fact the 61.8% Fibonacci retracement level of the entire 2008-12 bear trend also resides in close proximity, at 1.5450/2. In addition, there is also the 161.8% Fibonacci extension level of the most recent drop, at just below 1.5550. Meanwhile the momentum indicator RSI has created a triple bearish divergence with price, too. So there is a strong argument for a drop here, especially if crude oil manages to bounce back from around $30 a barrel.

Conservative bearish speculators may wish to wait for some sort of confirmation before entering this potential setup. This could either come directly from price action, such as a closing break below support at 1.5300, or from crude prices, for example a large bullish engulfing or hammer candlestick formation on the chart of WTI around a key level such as $30. If support at 1.5300 breaks down, the EUR/CAD could then drop to at least the psychological and support level of 1.5000 next, before deciding on its next move.

Alternatively, if oil breaks further lower, then the EUR/CAD could easily break out at this third time of asking. Bullish speculators may want to wait for the potential breakout to occur before jumping on the bandwagon. For the EUR/CAD bulls, the recent stock market turmoil is a favourable development as this boosts the appeal of funding currencies like the euro (as traders unwind their long euro-denominated stock and bond holdings, pushing yields higher). The bulls could use the Fibonacci extension levels shown on the chart as their next immediate targets, at 1.5915 and 1.5975 respectively.