USD/CAD forecast: Room for further upside

The USD/CAD pair closed above 1.30 yesterday for the first time since July 3, 2017 and will likely extend gains in the near future, the technical charts and bond yield spreads indicate. Further, the options market also points to a strong CAD put (Sell CAD) bias.

Daily chart

• The pair's rally from 1.2807 (March 11 low) and a close above 1.30 signals continuation of a higher high and higher low pattern (bullish setup).
• The move also adds credence to the golden cross - Bullish 50-DMA and 200-DMA crossover.
• The 5-day MA and 10-day MA is biased bullish.

So, the spot looks set to test rising channel resistance, currently seen at 1.3157. That said, the move may not happen immediately as the relative strength index (RSI) shows overbought conditions.

Monthly chart

An upside break of the bull flag pattern would signal continuation of the rally from 0.9394 (2011 low). . Note, the RSI has already breached the descending trendline, suggesting room for a rally to flag resistance seen at 1.3230.

View

• The pair looks set to test 1.3157 (rising channel resistance) - 1.3230 (bull flag resistance) in the next 5-6 weeks.
• A minor pullback to 1.29 cannot be ruled out in the short-run as suggested by the daily RSI.
• Only a close below 1.2803 (March 12 low) would signal bullish invalidation.

The action in the related markets also favors further rally in USD/CAD.

Risk reversals show strong CAD put bias

The USD/CAD one-month 25 delta risk reversals (CAD1MRR) are being paid at 0.425 CAD puts vs. 0.40 CAD puts yesterday (recent low was -0.20 or 0.20 CAD calls). Also, the implied volatility premium for CAD puts (0.425) is the highest since May 2017.

Also, three-month 25 delta risk reversals (CAD3MRR) show the implied volatility for CAD puts (currently at 0.45) is the highest since May 2017.

CAD3MRR

The above chart shows rounding bottom bullish reversal, meaning the demand for CAD puts or the implied volatility for CAD puts will likely continue rising in the near future.

Bond yield spreads favor USD

• Currently, the 2-year US-Canada bond yield spread stands at 121.67 basis points - the highest level since June 2008.
• Meanwhile, as seen on the chart below, 10-year spread has risen sharply in the recent days and has created a bull flag pattern, meaning the spread will likely continue to rise in the USD-positive manner in the near future.