In trading, it’s often said that “being right but early is the same thing as being wrong.” By that logic, last week’s article was “wrong” when we made the bearish case for USDCAD (see “USDCAD: Will There be Blood for USD Bulls?” for more), stating that “the bears are finally wresting control of the market from the bulls” and that “another quick drop back toward the 38.2% Fibonacci retracement at 1.20 could be in play.” Instead, we saw USDCAD bounce back to the middle of its range around 1.2600. However, I’ve also been told that “if at first you don’t succeed: try, try, try again” and based on today’s movements it looks like we were more “early-wrong” than “wrong-wrong” on the USDCAD bearish case.
In case you missed it, the Bank of Canada struck a relatively upbeat tone in today’s monetary policy meeting, particularly with regard to the temporary impact of the recent oil price shock. Meanwhile, we also saw a smaller-than-expected build in oil inventories, giving commodity traders the green light to drive oil out above established resistance at $54. Given the strong inverse correlation between US oil and USDCAD (20-day correlation coefficient = .64), it’s not surprise that the USDCAD is breaking below its corresponding support level.
Beyond that, many of the same technical themes we highlighted last week remain in play. The MACD has crossed below its signal line for the first time in nine months and the RSI at a similarly low level, providing support for the bearish bias. Earlier this year, USDCAD surged through the 1.20-1.24 zone in just two days, signaling a lack of trading interest between those two levels. It’s not out of the realm of possibility that the North American pair could see that move reverse with a quick move back down to the 38.2% Fibonacci retracement at 1.20 now that the 3-month, 400-pip range has finally broken. In the short-term, the path of least resistance for USDCAD will remain lower beneath previous-support-turned-resistance at 1.2400.