The EUR/CAD pair has taken an interesting turn on the forex dance floor recently, and we may need to update our trading strategies. The change mostly came in because of Ms. Loonie (forex geek name for Canadian dollar, or CAD) and Mr. Euro didn’t do anything to help the situation. I’m gonna be honest with you. I’m not a big fan of Mr. Euro any more. My best performing trades have  involved commodity currencies like Mr. Aussie, Ms. Loonie and Kiwi. Mr. Euro just keeps running in circles and frankly, I think he gets WAY too much attention from the media. Just like Donald Trump. But he is the single star of the European union and many members of the Invest Diva community request updates on his performance, so we have to keep them news coming.  Here are some nuggets of wisdom on the pair, from fundamental, technical and sentimental points of view, or in other words, the Invest Diva’s Diamond Analysis.

Economic Points

First things first, I’m a realist. Drop this and let the whole world feel it! Sorry I’ve been listening to way too much Iggy Azalea. So yeah, the first thing we need to know about global economy is that the International Monetary Fund (IMF) sees a risk of bad times coming up in in G7 economies, as a result of rocky emerging markets and continued low inflation.They say the US and the UK will still be the fastest and second fastest growing major economies, but has still reduced growth forecasts in both by 0.2%.

Commodity driven economies will be the hardest hit, the IMF predicts, with exporters of raw materials suffering with already low prices and further falling demand. That fall in demand is coming from China, which continues to slow down, dumping their problems on almost every economy in the world to some degree. Interestingly, the UK would be among the least affected by China, with a 3% fall in Chinese GDP growth only expected to take 0.1% off UK GDP.

Perhaps the worst part of the IMF assessment is that it didn’t offer much in the way of ideas in how to deal with the issues identified!

Europe’ Side

September’s composite eurozone purchasing managers index (PMI) fell to 53.6, down from 54.3 in August and versus the flash reading of 53.9 released Sept. 23. Both manufacturing and services showed signs of slippage. Some economists saw that as disappointing, and forex market participants are on alert for any signs of a spillover from the troubles in emerging markets to advanced economies.

The interesting thing is that investors are taking any signs of weakness as evidence that the European Central Bank (ECB) should loosen policy further. What we should keep in mind that quantitative easing (QE) is probably not a recovery solution to European problems but rather a bandage solution: it may simply delay worse economic outcomes.

But looking at the PMI by itself may not be enough. European retail sales and business climate and industrial confidence seem to have picked up in the past month. Looking at the big picture for the medium term, and takeaways from ECB president Mario Draghi (Super Mario), the good news for Mr. Euro is that the eurozone appears have put the worst behind for now and  the central bank’s accommodative monetary policy could be working.

So with that, fundamentally speaking we could expect Mr. Euro to continue sideways a bit longer with a tint of gains.

Canada’s side

Back to the IMF story, the International Monetary Fund seems pretty negative on Canada’s economic prospects for next year, warning that the depressed commodity prices which have slowed the Canadian and global economies in 2015 will remain a major threat to growth in 2016. Canada’s interest rates have remained fixed at 0.5% after the Bank of Canada (BoC) cut the rates from 0.75% back in May 2015.  That is when we saw yet another drop in Ms.Loonie. Oops! Sorry Loonie! But how do you describe the recent gains in the Canadian currency?

A number of factors are contributing to this one, rising oil prices and better than expected Canadian GDP being the main ones.  As an avid Invest Diva reader, you probably know that the Loonie has a direct correlation with oil prices. This positive correlation can be directly attributed to the way Canada earns US dollars: A large part of Canada’s US dollar income comes from the sale of energy-based goods to the rest of the world and to the USA in particular.

What’s up with oil?

The international price of crude oil has gone up this week, to more than $50 a barrel. This can be attributed to the decline in US output, as well as continued Russian military operations in Syria, raising concerns over the potential for a wider conflict that could disrupt the flow of oil in the region.

But let’s not forget another major factor that could impact oil prices in the near term: the Iran deal.

Iran is likely to export more oil as international sanctions lift. What’s unknown is how much, and how soon. In the mean time, if the oil prices rise enough, to say $60, many drillers in North Dakota and Texas will pump again. And more oil in the world would pressure prices back down.

Canadian Dollar (CAD) Summary

While the economists have been warning about a Canadian recession, the economy is showing new resilience — rebounding in subsequent months and providing hope of more growth for the rest of the year with their GDP numbers.

However, depending on the direction of oil prices, the up-moves of Ms. Loonie could be short-lived.  Including the IMF remarks to the fundamental bundle, we are more in a wait-and-see position before putting the possibility of a recession off the table.

Technical Points

The EUR/CAD pair needs to be analyzed from at least two different perspectives: monthly and daily. Looking at the EUR/CAD monthly chart, we realize that the pair may be forming a Head and Shoulders Bottom  pattern on the forex dance floor. If you have been paying attention during your Invest Diva lessons (shame on you if you didn’t!) you’d know that the Head and Shoulders pattern (or as we call it, the H&S dude) shows his ugly head during a trend, and that trend normally reverses when the pattern confirms.

In this case, it appears that the H&S Bottom Dude started the game back in 2009, formed his left shoulder in 2010, his head in 2012 and his shoulder as recent as May 2015. The neckline of the pattern has yet to be confirmed, however the interesting thing to point out is that the pair has broken above the Ichimoku cloud as well, strengthening the potential of a bullish reversal in a long run. The neckline lies at 1.5160 and was tested twice in the past couple of months,but the pair was unable to break above it. Now we are seeing a bearish candlestick forming after 5 consecutive months of upward candles. The retrace actually is quite normal technically speaking because the pair gets tired of moving in one direction for a long period of time and needs to take a rest you know!

This brings us to Mr. Fibonacci. We want to know how low the pair can go before shooting back up, a scenario that seems likely based on our previous fundamental analysis. For now the pair has tested below the 23% Fibonacci level and is being supported by the 38% Fibo level at around 1.45. A break below 1.45 would bring the pair to pivot zone and a break below the 50% Fibo level at 1.4250 could alter our scenario to long-term bearish with 1.40 set as first alternative target.

Market Sentiment

For this we are turning to the shorter time frame, namely the EUR/CAD daily chart. This gives us a more detailed perspective on the pair’s recent movements. After the most recent pullback which started end of September, the pair now seems to be kinda indecisive and has been mostly moving sideways inside the Ichimoku cloud, unable to even reach the 38% Fibonacci level.

This backs up our wait-and-see scenario from the Fundamental analysis and any major moves should be a result of a hot market moving event.

EUR/CAD Forex Trading Strategy

If you are already in a bullish position, you may need to patient with the market to turn in your favor, maybe as long as a few months. If you caught the recent pullback in time and are in a bearish position, I would aim a bit higher than our first support level at around 1.4550.If you are not in a position, kudos to you! Wait for a confirmation of the Head & Shoulders pattern for a bullish scenario, or a break below 1.4250 for a bearish one.

Last but not least, here are the important levels to watch out for:

Supports, Pivots and Resistance Levels

Important Note: The support and resistance levels are not suitable for all traders and largely depend on your account size, margin and leverage. Book a private lesson to learn how to personalize your account based on our trading guide.