The Loonie Not at its Bottom Yet

The fall of the USD against the CAD has been one of the most popular short positions of 2016. Remarkably uniform and consistent, the pair may have finally run out of steam but could be looking at some further falls in the near future. With a new stimulus package in the works, Canada might be about to push the pair even lower.

The adoption of the stimulus is projected to cause a $2.9 Billion CAD deficit, a fact that seems to have barely phased the markets. The price has barely shifted after Tuesday’s announcement, the pair still hovering around a recently found support at the 1.1304 level. The temporary pause in the unrelenting price fall is propped up mainly by the USDCAD movement into oversold territory. With Stochastic and RSI oscillators signalling to the market that the time to sell had briefly passed.

For some, the pause might be a sign that the trend is ending and the USD is about to begina climb against its North American neighbour’s currency. However, what traders may want to take notice of is the now reduced likelihood that the Bank of Canada will be forced to cut rates this April. With a very strong chance that the Canadian rate will remain unchanged, the US Fed’s recent dovishness takes centre stage.

Despite recent hints of a rate hike in April, I would be surprised if Yellen backed off her dovish stance so soon. With Evans’ “wait and see stance” lending credence to the argument that the Fed intends to remain dovish, a hike would certainly come as a surprise. Therefore, we can be fairly sure that neither the Fed nor the Bank of Canada is likely to be moving rates this April. If the central banks aren’t going to be interfering, the underlying economies will be causing any future price movements

The mechanisms pushing the pair lower could still be in play and continue to give the Bears something to look at over the next few months. If the current support is broken it’s a long way down to the next one. With the next solid support level coming in at the 1.2208 level, another fall is of significant interest to short sellers. One barely needs to draw a channel to where the current downward channel is constrained and where it could continue to fallto.

Amid continuing speculation anddoubt over the US economic recovery, another breakout is not too outlandish. The pair looks especially likely to fall again if the Canadian stimulus has its intended effect and lifts growth by 0.5-1.0%. With the US Already struggling to keep up with other economies, falling further behind could restart the downwards spiral. The 100 day EMA would begin to take an even sharper nose dive if the Canadian economy began to pull ahead.

Unless the US is seriously able to lift its GDP growth relative to Canada, I think the USD will continue to lose against the CAD. The stimulus being implemented by the Canadians could feasibly prevent this from happening and then we can watch the trend search for a new bottom. Fundamentally and technically there looks to be little stopping the pair from going lower and I’m not convinced the current support will hold much longer.