USD/CAD extends decline

Remember THAT bullish breakout in the USD/CAD from the bearish channel on September 4? Well, that turned out to be a massive bull trap! Rates have fallen sharply ever since and more losses could be on the way over the coming days.

The biggest clue that the buyers were getting in trouble was when rates broke back below the point of origin of that breakout at 1.31 on Tuesday of last week. Since then, price has struggled to push back higher, confirming that the sellers have remained in control.

And today they have shown their presence once again, with the Loonie creating another fake-out as it briefly rose above Monday’s high before quickly reversing to create a bearish engulfing candle on the daily chart.

Given the above bearish behaviour of the USD/CAD, we would expect to see rates drift further lower in the upcoming days. Potential support comes around 1.2960, a level which was formerly resistance. But with price action looking bearish, this level could break down, leading to a potential run on the liquidity that would be resting below the most recent low at 1.2885 next, with the bears potentially eyeing the 50% retracement at 1.2720/5 as their next major objective.

Short-term resistance comes in at 1.3005 – this level being the low from Monday. This will be the first line of defence now for the bears on the daily time frame.

As things stand, we would only consider the bullish argument if rates were to go back above the 1.3100 resistance level, or we see the formation of a distinct reversal price pattern at lower levels first.  However, if the USD/CAD recovers and goes back above Monday’s high of 1.3045 again, then this would reduce the strength of the bearish case massively. 

Figure 1:

Source: TradingView and FOREX.com.