What’s Next for the Loonie?

Key Points:

• A breakout is likely and this should be to the upside.

• Long-term channel should remain intact.

• The pair should reverse to the centre of the channel.

The Loonie is fast approaching a critical point where it must decide where exactly it wants to end up. On the one hand, it could finally break free of the ascending channel that has largely constrained its movements over the past months. On the other hand, a breakout from the near-term wedge could mean we see a rally back to the centre of this long-standing channel. As a result, it’s worth delving into some of the technicals to get a feel for what we can expect moving forward.

First and foremost, it’s quite clear on the daily chart that the narrowing price action of the falling wedge should lead to a breakout in one direction or the other in the very near-term. As a result of this particular wedge, the pair should be predisposed to breaking out on the upside which would also respect the downside constraint of the long-term channel. Due to this coincidence, a rally is looking much more likely than a downside breakout from a technical perspective at least.

Moreover, moving higher would, generally speaking, be inline with some of the other technical signals. Specifically, the MACD oscillator remains bullish and it wouldn’t take much in the way of buying pressure to invert the Parabolic SAR’s bias to follow suit. Additionally, both the RSI and stochastics are in neutral territory which means there is plenty of room to rally before fears that the Loonie is becoming overbought would arise.

The main deterrent that could prevent the bulls from staging a comeback is the EMA bias. As shown above, the 12, 20, and 100 day moving averages are all in a highly bearish configuration which would tend to indicate losses are set to extend moving ahead. However, on the balance of things, there seems to be more evidence suggestive of a reversal back to the centre of the channel rather than a breakout from the lower constraint of this objectively robust structure. 

On the fundamental front, despite the USD’s rather baffling response to yesterday’s strong data, the outlook for the US economy is looking firmer than it has in some time. Combined with optimism over Trump’s tax policy and the jump in probability for a US rate hike to 44% in March, the market should continue to move backto the greenback which would be in line with the technical forecast.

Ultimately, keep an eye on this pair as the week draws to a close and early next week as there is likely to be at least one or two sessions remaining before a reversal is required. Furthermore, be alert for any update on that ‘phenomenal’ tax plan as it is likely to generate some waves.