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The US dollar has bounced from a three-year low against the Canadian dollar after finding strong technical support from extended trendline support, around the 1.2045 level.
On a fundamental level, a strong bounce back in the greenback due to rising inflationary pressure inside the April CPI report. And a recent pullback in crude oil prices is also seen as bearish for the Canadian dollar.
Looking on the daily price chart, the USDCAD it certainly appears that pair reversed from key trendline support, which is taken by attaching a trendline from the June 2020 trading low to the September 2020 trading low.
Given that inflation is probably not just going to be contained to the United States economy, it is likely that the Canadian economy, which is closely linked to the U.S., is going to experience significant inflationary pressure as well.
If we consider that the Bank of Canada is already tapering its QE purchases it is likely that a ramp up in inflation in Canada may tip the central bank in an even more hawkish direction, meaning that Canada is likely to raise rates before the United States.
This is why I believe that the USDCAD pair probably has more downside in the tank, and could even trade below the 1.2000 level, and move into a new range between 1.1500 and 1.1800 at some stage this year.
Something we are seeing now is incredibly levels of positive sentiment towards the USDCAD pair amongst retail participants. According to the ActivTrades market sentiment tool, 93 percent of traders are bullish towards the USDCAD pair.
This extreme one-way sentiment skew does not bode well for the bull case surrounding the USDCAD pair. Retail traders are often on the wrong side of the market, and this sentiment extreme is likely to be a bearish warning.
USDCAD Short-Term Technical Analysis
The one-hour time frame shows that a bearish head and shoulders pattern has reached its downside objective. Bullish MACD divergence is warning of a stronger correction in the short-term.
According to technical analysis bullish MACD price divergence extends up towards the 1.2250 level. I would expect that this divergence will remain in place. However, the short-term trend still remains bearish while the USDCAD pair is capped below the 1.2400 level.
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USDCAD Medium-Term Technical Analysis
Looking at the weekly time frame chart, the USDCAD pair has extended weekly support around the 1.1900 level. This would be bearish target if the 1.2045 level is broken over the coming days and weeks.
Overall, the downtrend remains strong, bulls need to move the price above the 1.2800 level to change the overall trend, therefore selling into rallies is still advised.
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