USD/CAD – Buying dips within rising channel

USD/CAD pushed higher to 1.3079 before cooling off, in sync with our prior guidance as domestic oil prices declined by 19% which led to a bout of CAD weakening
Chief Investment Office28 Jun 2022
Photo credit: AFP Photo

Chart 1

Source: Bloomberg

USD/CAD has pulled higher to fetch a recent 1.3079 high, before cooling off. USD’s move higher is in sync with our prior guidance (9 June 2022 FX Technicals USD/CAD: Going long at base of rising channel) that domestic oil prices would lead CAD prices. The 19% decline on the Western Canada Select Crude Oil prices to 84.06 thus weighed on CAD. USD’s move to re-test the prior 1.3077 highs but not surmounting it prompts two observations. We have a 1.3077-1.3079 double top that has seen a swift response of USD backtracking. There is as well the repeat of a bearish head-and-shoulders pattern – albeit of a much smaller dose, and this should limit a USD decline on its own.

Chart 2

Source: Bloomberg

The ranges that we have been seeing since early April broadly suggests USD/CAD is straddling a broad 1.24-1.31 range. With a double top in place, recent sentiment has turned mildly in favour of CAD. However, positioning reports reveals at most a neutral stance with a block trade of USD469m hitting the trading sheets, and that has pruned open interest to low positioning levels. This shows either the market is disinterested, trading ranges, or waiting for breakouts.

Chart 3

Source: Bloomberg

Our navigation mapping sheds some light on the 5.4% range compression since early April. USD/CAD saw a sharp 18.1% plunge from March 2020’s 1.4668 highs via the path of fi ve price legs down 1-2-3-4-5. Since, USD has trooped higher from 1.2007 lows within the form of a rising channel where USD is seeing in place the corrective legs of ABC. At this juncture, USD is pursuing the B leg, hence upside pressure is prevalent within this channel. In our prior guidance, we explored two potential targets that would see the completion of this rising channel. A 100% extrapolation of the distance between 1.2653 to 1.2007, as measured off 1.2288 accorded a move to meet the 38.2% Fibonacci retracement of 1.4668-1.2007 (that marks the sharp plunge from 1.4668 highs) at 1.3024 – this has been met with the 1.3079 high. The second target remains possible, and would tangent with the 38.2% Fibonacci retracement of the 1.4668-1.2007 range extremes that calibrates 1.3338.

Chart 4

Source: Bloomberg

Tightening the price action to a shorter four-hourly time frame, the price action is unfolding that of a flat correction. This would mean we are embarking on a fresh price path marking 1… 5 ( 5 p rice l egs) if USD holds above the Ichimoku weekly support at 1.2485. Support is pegged into the 1.2767-1.2732 zone (red zone on Chart 4), where the latter marks the 61.8% Fibonacci retracement of 1.2518-1.3079. We pursue the line of thought that a smaller head-and-shoulders top curtails heavier USD selling, and that is reflected in a low momentum ADX reading. Separately, surmounting 1.3077 and through 1.3172 brightens the odds for price leg B (on Chart 3) to terminate and to begin the downleg of C. As a mark of exhaustion, we would be keen sellers of USD up 1.3330, relying on a 1.3455 invalidation.

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