The US dollar has fallen back towards the 1.2500 level against the US dollar after the Bank of Canada became the first major global central bank to taper QE. The USDCAD pair lost more than 100 points after the BOC policy meeting yesterday.
Canadian policy members agreed on Wednesday to scale back their bond buying program, which focused on purchasing Canadian government debt. The central bank will reduce purchases by a quarter, to $2.4 billion, and also committed to accelerate the timetable for a possible rate increase.
The USDCAD pair now faces an upcoming triple threat. The threats come from a divergence in central bank policy between the Federal Reserve and the Bank of Canada, broad weakness in the US dollar, and rising oil prices.
So far, the saving grace for the USDCAD pair has been oil prices. Oil prices have remained under pressure over recent days, which has to some degree cushioned the fall in the USDCAD pair, as the Canadian dollar is heavily influenced by the fluctuations in oil prices.
A potential super cycle in commodity prices bodes well for the Canadian dollar. During the last super cycle, before the 2008 financial crash, the Canadian dollar rose sharply, with the USDCAD pair falling below parity.
Going forward, the downtrend in the USDCAD pair looks here to stay, and especially if the Bank of Canada cuts interest rates while the Federal Reserve continue to sit on the fence. Any hawkish shift from the FED could derail this trade, however, bears remain largely in control until this happens.
The technicals are also complimenting the fundamentals right now, and are pointing to a potential decline in the USDCAD pair towards the 1.2000 handle over the medium-term horizon. The near-term battle appears to be around the 1.2480 to 1.2600 region.
According to the ActivTrades market sentiment some 86 percent of traders are bullish towards the USDCAD pair. Such a one-way skew amongst retail traders is typically not a good sign, so we should expect further losses in the USDCAD pair while this remains the case.
USDCAD Short-Term Technical Analysis
The four-hour time frame shows that a symmetrical triangle pattern has formed. Typically, these type of price patterns are known to be fairly reliable in signalling upcoming technical breakouts.
Looking more closely at the pattern, the lower end of the pattern is found at the 1.2480 support level, while the top is located close to the 1.2600 resistance level.
Watch out for a directional move of over 100 points once a breakout from the triangle pattern takes place. Key resistance is found at the 1.2525 and 1.2580 levels.
USDCAD Medium-Term Technical Analysis
Looking at the daily time chart, the USDCAD pair is trapped inside an extremely large falling price channel. Falling price channels are known to be amongst the most powerful bearish continuation patterns until a breakout above the top of the pattern occurs.
Bulls currently need to move the price above the 1.265 level to activate the bullish pattern. A drop under the wedge at this stage would be very bearish for the overall medium-term picture.