Towards the beginning of December we highlighted USDCAD’s break to a new multi-year high, however this optimism was thwarted by our proprietary model which suggested the pair may have gone a bit too far too fast and as a result we cautioned USDCAD bulls.
While USDCAD has been forming a series of higher highs and higher lows since mid-September (the definition of an uptrend) there are a few signs which have emerged that suggest a more gloomy outlook. On Dec. 12th USDCAD tested the August high around 1.0565 and caught a significant bid, yet this rebound proved to be anything but as it formed a bearish engulfing candlestick a mere 24-hours later. This, in conjunction with that fact that daily RSI broke below corresponding channel support in advance to price, has led us to believe a break lower could materialize. Currently, channel support resides around 1.0560/65, but if this were to give way the next key level of support is 1.0500/10 – Convergence of 38.2% retracement, trendline (resistance turned support) & psychological/option related significance.
Key data & events which may influence USDCAD this week:
- US November CPI
- US Nov. Housing Starts
- FOMC meeting
- US Dec. Philadelphia Fed
- US Nov. Existing Home Sales
- US Nov. Leading Index
- Canada November CPI
- Canada October Retail Sales
- US 3Q GDP (final)
Chart Source: Forex Charts by eSignal
For further clarity, we decided to have another look at our USDCAD proprietary model.
Proprietary model takes into account:
- USDCAD’s 3-month at-the-money option volatility
- CRB Index
- 5-year interest rate differential between the United States & Canada
This produces an R2 of 0.8849 since the beginning of December 2011 and implies a “fair value” of 1.0516. This suggests USDCAD is moving in the right direction since it is now overvalued by only 1.0 standard deviations, which is down from 1.9 on December 5th, but still advocates the Loonie may have a bit further to go.
Source: Bloomberg, FOREX.com
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