USD/CAD OUTLOOK: NEUTRAL
- USD/CAD has risen aggressively in recent weeks, moving from 1.2400 in early April to the edge of 1.2900 this week
- Negative sentiment, hawkish repricing of Fed rate hike expectations and broad-based U.S. dollar strength in the foreign exchange market has weighed on the Canadian Dollar
- While the USD/CAD appears biased to the upside, but the recent advance may struggle to carry further as a key resistance near 1.2900/1.2915 may block the path higher
Early in April, USD/CAD flirted with the 1.2400 level, but it has seen exploded higher, rising towards the 1.2900 area amid risk-off mood, hawkish repricing of Fed rate hike expectations and broad-based U.S. dollar strength in the foreign exchange market.
With Wall Street and global stocks in turmoil, sentiment has soured, prompting traders to dump high beta currencies and increase exposure to the king USD, a safe haven asset by excellence. It is then no surprise that the Canadian dollar, known colloquially as the “Loonie”, has weakened sharply against the greenback in recent weeks, despite solid domestic fundamentals and BoC’s aggressive tightening cycle.
Focusing on technical analysis, we can see that the latest USD/CAD rally has stalled near a key ceiling stretching from 1.2900 to 1.2915. Sellers have shown up when prices have reached this area on numerous occasions since last year, halting advances and pushing the exchange rate back down almost every time, as shown in the daily chart below, so a bearish reversal from current levels should not be ruled out, as it could be on the horizon for the next few days.
If the USD/CAD inflects lower and begins a rapid descent, support is seen at the psychological 1.2800 handle. Upon a retest, we’d need to see the market reaction to better assess the near-term outlook, but if the bears manage to remove this floor from the picture, the pair could be on its way to challenge the May’s low near 1.2715. On further weakness, the focus shifts down to 1.2675, followed by 1.2640, the 200-day simple moving average.
On the other hand, if USD/CAD breaks out on the topside, moving above the 1.2900-1.2915 hurdle decisively in daily closing prices, buying interest could pick up momentum and set the stage for rally towards the 2021 high around 1.2965. From a chartist point of view, this resistance must hold, otherwise we could see a sharp upswing in the near-term considering that there are no technical barriers until 1.3090/1.3100 (see daily chart for details).
USD/CAD TECHNICAL CHART
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—Written by Diego Colman, Market Strategist