The USD/CAD currency pair has rebounded this week following last week’s decline. The pair hit new 12-month high of about 1.3314 in June as the Canadian dollar struggled to keep up with the greenback, which had benefited from another rate hike and an impressive economic data.
However, since the last week of June, the tables appeared to turn with the Loonie gaining significantly against the USD to trigger a massive bearish run that brought the pair to trade at about 1.3100 region. During this period, the USD/CAD currency pair dropped more than 200 pips as the U.S. continued to engage in trade wars with China and the EU.
Nonetheless, the greenback seems to be ready to hit back this week following the 3-day rise that has taken the pair back to trade above the 1.3200 level thereby triggering a bullish sentiment that now seems to expect a retest of the current 12-month high.
Technical Analysis
So, what will traders be looking for in the coming days and weeks? The 4-hourly chart below tries to provide some insights into potential trading targets and opportunities.
As demonstrated on the 4-hourly chart above, the USD/CAD currency pair currently appears to be trading in what statistically would be an outlier zone in 2018.
The pair made a bullish breakout of the key trading zone indicated above in June and has not returned to trade within the same range since then. Therefore, the bears will be looking at the potential of the pair dropping back to trade within the confines of that range, which takes place between the 1.2750 and 1.3100 levels.
As such, (S1) at around 1.3100 would provide a realistic short-term target while (S2) at 1.2750 could be achieved in the intermediate timeframe if the pair drops to the key consolidation zone.
On the other hand, the bulls will be looking at the potential of the pair retesting 1.3300/14 as a short-term trading opportunity. Currently, the greenback seems to be carrying all the momentum towards the end of the week, which makes next week an interesting prospect to aim for 1.3300.
Expanding the view to the daily chart also creates more opportunities for the bulls, and even a lot more for the bears. The USD/CAD currency pair appears to be trading within a bullish channel, which also runs parallel to a prior channel that it bearishly broke out of 12 months ago.
If the same scenario were to be repeated, then traders can expect the pair to trade within this channel for the better part of the next 3-5 months. However, that is looking increasingly unlikely especially given the current economic conditions of both countries.
Fundamental analysis
The greenback remained resilient on Wednesday even after Canada announced a fourth-rate hike in 12 months to bring the key interest rate of the country to 1.5%. The limited impact on the USD/CAD currency pair following this announcement by the Bank of Canada was primarily because most traders were already expecting it and had acted on it in the previous week.
Furthermore, the Canadian economy relies heavily on oil and given the current decline in WTI Crude prices, this was inevitably going to take a toll on the Loonie. Earlier on Wednesday, WTI crude fell 4.9% after facing a delayed reaction to the escalation in trade tensions. Later in the day, news that a severe Libyan outage was coming to an end also dragged Brent crude down 6.1%.
Nonetheless, the Bank of Canada remains optimistic on the country’s economic outlook with the country expected to experience 2.5% inflation rate at some point this year before the rate slows back to 2% in mid next year. The Canadian economy is also seen expanding by about 2% per year between 2018 and 2020, and this should provide the bears with something to be optimistic about when trading the USD/CAD currency pair.
Meanwhile, the greenback has benefited from a series of strong economic data. According to analysts from Nomura, PPI inflation growth of 0.3% in June from May is seen supporting the USD. On the other hand, a 0.6% month over month increment in wholesale inventories is also expected to boost the greenback.
In summary, the USD/CAD currency pair looks set for a short-term bull run before a major pullback takes place. If the pullback happens, it will most likely be triggered by an economic event rather than a technical bias.