The warm summer months have meant a defiant show of strength north of the US border, as the Canadian Dollar has been on a tear since mid-May. After a brief rest during the first two weeks of August when the US Dollar recovered some lost ground and executed a very mild reversal, the Loonie has been back at it and resumed its inspired march to drive the USDCAD pair lower through the second half of the month.
Set up for the Current Trend
The current trend in USDCAD is the result of a four phase move from the late July window through now. First, USDCAD hit a double bottom which triggered an up move. Then, it found a support level around 126.80 which passed several tests. However, the upward arc ran out of energy before it could meaningfully sustain, and late last week we broke through support. The 126.80 level that had been support was quickly established as a platform of resistance and after one test on a mild retracement, it served as a rigid pivot point and sent the pair lower.
We are now in a harsh arc pattern that offers withering hope for a bullish position in USDCAD. When considered in the context of our summer long descent, the current arc serves as a stark reminder of where this pair seems ultimately headed.
Short Term Price Moves
In the near term, a defined pitchfork pattern has emerged as the pair carves a steep downward channel through the backside of the arc. Price levels have coiled tightly around the midpoint of the channel and the level of consistency in the gradient of the downward trend is quite impressive.
Keep a Watchful Eye Towards Oil
This currency pair has a long relationship with oil and the price of WTI Crude can provide an additional signal for traders. The Canadian Dollar is closely linked with oil, and the USDCAD pair is inversely correlated with the price of WTI. Below is a linear model demonstrating the trend over a five-year period. The correlation between the two over that five-year window is roughly 86%.
While we remain long term bearish on oil, there is a basis for an expectation of a retracement in WTI today resulting in an upward drift up after yesterday’s steep losses which were the outcome of trades related to the severe weather in the Gulf. While we could see a high above 48.00 and ascending to a comfortable level around 48.15 to close the week, all that would be needed to establish constructive support for CAD would be gradually ascending higher lows from WTI. We are seeing early indications of that in today’s oil trade.
Here is a look at WTI in the early morning session:
Outlook for Today
The base expectation today is for a possible extension of the move lower in USDCAD along the relatively consistent shape it is currently proceeding through. If this happens, the pair could close below the psychologically important level of 125.00 for today and we see elevated probabilities for that potential. Traders should monitor the price of WTI, as well as the news flow from the central bank symposium in Jackson Hole for any surprises. An unforeseen overtly hawkish tone from the US Federal Reserve Chair or another round of weather related volatility today in oil could provide a different and unexpected structure for the day’s action.