USDCAD Analysis: Looking At The Loonie

Following the Bank Of Canada’s rate cut yesterday we saw USDCAD taking out the key 1.2840 bringing price just shy of the 1.3060 2009 highs. The move was largely expected as concerns surrounding the Canadian economy stemming from the sharp deterioration in Oil prices have been a key focus this year.

Looking at the Monetray Policy statement released yesterday it’s clear that perhaps this won’t be the last cut this year.

“The weak economic performance in the first half of this year means that Canada has more excess capacity, which is increasing the downward pressure on the underlying trend in inflation…..the downside risk to future inflation is material. This would imply a slower return to full economic capacity and sustainable 2 per cent inflation.”

Again, a rate cut at this point was widely anticipated, if we look at the chart below, which shows the COT data via our COT indicator, we can see that commercials stopped hedging against Canadian Dollar strength in June with Non-Commercials taking the other side. Notably we can see that hedge funds and other speculative players started positioning for CAD weakness in late May, no doubt gauging the likelihood of a rate cut on the Oil price induced damage to the Canadian economy.

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However, once again retail traders were on the wrong side of this trade with Order Books showing retailers only 30-40% long.

Not only did yesterday bring the BOC rate cut and gloomy Monetary Policy report, but we also had comments from the Fed Chair Yellen confirming that the Fed remains on track to raise rates this year.

Added to this picture, the situation with Oil prices currently doesn’t look too inspiring for the Canadian currency either having recently continued it’s sell off having retested the long term trend line which has capped price from last year.

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So, with USDCAD having broken through key resistance and stalled at these lofty levels, the question is what now?

Price action following the spike higher, price action has remained really strong, with only a very shallow pullback so far, indicative of how short the retail market is. We’ve maintained a tight 60 pip range at highs.

Looking to set longs on a retest of the 1.2840 area seems reasonable (should price come back) looking for price action and Order Flow to confirm playing retest of broken highs. 

As with the pull back to retest the breakout in USDJPY, it’s important to look at these breakout levels as areas instead of a specific line as we usually run deep into the zone flushing out weak longs so it’s good to look for the next level down to identify another strong buying zone should price push lower.

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Back to USDCAD

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We can see strong technical support around the April 14th and May 26th highs noting rising trendline support around in the same area also. A pullback of equal length to the pullback from May highs would bring us nicely into that zone but hard to see a 300 pip retrace from here. Will be watching for a pullback into the initial breakout zone first.

Going to be interesting to see how this plays out. Order Flow is still bullish here and could well be that we take another shot at the 2009 highs before we get a pullback entry to this trade. Lets see.  Canadian & US CPI data tomorrow will dictate which area we see first.

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