Dee Rooney, Alpari analyst contest participant
The uptrend in the USDCAD pair that began in 2011 has been fueled by a stronger US dollar and weaker oil prices. This trend is now accelerating because the US has entered a rising interest rate cycle and oil prices continue to decline in the face of excess supply and weak demand.
From the above monthly chart we can see there is clearly room for further gains: the next Fibonacci retracement level coincides with December 200 support levels at 1.4325 and above that is the round number 1.5000 in the middle of a former area of congestion and ultimately the 2002 high of 1.6175.
Looking at a weekly chart (below) the acceleration in trend can be more clearly seen as prices move from the lower pitchfork line towards the middle line. Once again we see RSI supporting the uptrend and if RSI breaks above the upper (blue) trend line, we could see significant gains from current levels.
As the year end approached, this pair entered a consolidation phase trading between 1.3810 – 1.3995. From the 4 hour chart (below), we can see that this consolidation is a pause in a well-defined uptrend: MACD fell as momentum declined and prices moved sideways and RSI found support at 40. Both are moving higher as the currency pair attempts to break out of this horizontal channel. Typically traders would capture this breakout opportunity by entering a long position at current levels and placing a stop at or just below the marked channel with targets indicated above. Stops can be trailed as the uptrend resumes to protect any gains.
However, the risk to this trade is the future direction of oil prices as USD strength is virtually assured near term given the expectation of future interest rate increases. Additionally, a strong dollar also creates a headwind for any future oil price rally. In the weekly oil chart below there is a descending wedge accompanied by bullish RSI divergence which typically results in a trend reversal. A break of the lower trendlines on both price and RSI would negate this bullish pattern.