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USDCAD: Which Way Will We Wander?

It’s been a relatively quiet start to the trading week thus far, with the US dollar initially pulling back yesterday before resuming its uptrend in today’s trade (see my colleague Kathleen Brooks’ report, “The Dollar Yields to No One” for more). Volatility is expected to pick up later this week, starting with tomorrow’s Eurogroup meetings on Greece and Thursday’s Quarterly Inflation report from the Bank of England, but US traders may be in store for another slow session first.

That said, there is one currency pair that’s ripe for a possible breakout in the next 24 hours: USDCAD. The North American pair has been locked in a tight battle between bulls and bears, with neither side making much progress, since the start of the month (perhaps mirroring the recent consolidation in oil prices – see my colleague Fawad Razaqzada’s note, “Crude Mixed as Traders Weight Supply Outlook” for more).

Turning our attention to the chart, rates have carved out a 1-week symmetrical triangle pattern centered on 1.2475. For the uninitiated, this pattern is analogous to a person compressing a coiled spring: as the range continues to contract, energy builds up within the spring. When one of the pressure points is eventually removed, the spring will explode in that direction.

While it’s notoriously difficult to predict the direction of the breakout in advance, technical oscillators can often provide confirmation of a breakout. In this case, the RSI indicator is carving out a corresponding symmetrical triangle; a breakout from the RSI’s triangle could serve as a valuable leading/confirming indication of a breakout in the USDCAD exchange rate itself. As one warning though: if the symmetrical triangle does not break out today, it may lose some of its strength as rates consolidate through the pattern.

That said, if we do see an injection of volatility, a USDCAD breakout could present a trade for opportunistic readers. Given the 300-pip height of the triangle, a bullish breakout could open the door for a potential retest of January’s highs near 1.2800, while a bearish breakdown could clear the way for a drop to the 3-week low at 1.2350 or eventually all the way down toward 1.2200.

It’s often just when traders lose interest that we see a big move in the market, and that exact situation could be shaping up in USDCAD this week.



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