How low can USD/CAD go? Canadian dollar has been singing “What doesn’t kill you make you stronger” since January while US dollar is looking for ways to regain her strength. In order to plan our USDCAD forex trading strategies March 2016, we need to conduct an Invest Diva Diamond analysis on this pair.
Is this a long term reversal? Or just a mere pullback?
1- Canada’s Economic Outlook
Experienced Invest Divas know that Canada’s economy is strongly correlated to oil prices. With the falling oil prices in 2015, many market participants were worried about a Canadian recession. But things seem to have changed now and the market sentiment has found a new direction. Here are some Canadian factors that could weight on USDCAD forex trading strategies March 2016:
- BOC was happy in January: Back in January Bank of Canada (BOC) officials sounded surprisingly upbeat. They said the crude oil situation could eventually turn around for Canada’s ailing energy sector. This triggered a massive forex rally for the Canadian dollar (CAD, Loonie). BOC policymakers also noted that the government’s fiscal policies might be enough to keep the Canadian economy afloat for the time being.
- Oil projected to recover in 2016: With major oil suppliers such as Iran, Saudi Arabia and Russia agreeing to slow down their productions, many analysts are seeing a bright future in oil prices. At least the speculation of lower supply and higher demand so far has put an end to the falling WTI prices. WTI is currently testing the 38 level, completing a Double Bottom chart pattern and rising from the lows of 27. Certainly good news for the Canadian dollar and explains the recent rally.
- BOC might not consider a rate cut: Coming up on the economic calendar is BOC rate statement on Wednesday at 3 PM GMT. Learning from their previous statement, a rate cut seems unlikely.in his speech on February 8th 2016, BOC Deputy Governor Timothy Lane implied that the BOC is reluctant to cut rates further since BOC officials “knew that lowering the policy rate could worsen vulnerabilities related to household debt.”
- Canada’s unemployment rate at 2 year high: While many indicators are on the positive side, Canada’s jobless rate is struggling and has yet to reach the 2008 lows of 5.8. If the numbers come out better than the expected 7.2% this Friday at at 1:30 PM GMT, it could contribute to further strength for the loonie, and a stronger bearish scenario for USD/CAD forex strategies March 2016.
- CAD strength might already have been priced in: Forex puppet masters certainly contributed to the USD/CAD sentiment change. The CFTC data shows that giant forex market movers have been exiting their Loonie sell positions since December 2015 after the USD/CAD pair reached the high of 1.47. This backed up the fundamental points for USD/CAD drops from a sentimental point of view. However the selloff could slow down as the USD/CAD could reach an oversold zone.
Summary: Canada’s economy doesn’t look too shabby anymore, while there is certainly room for improvement. A negative shock in oil prices could shake the Loonie to its core. The bearish market sentiment could slow down as the pair reaches strong support levels. Read below for technical analysis.
2- US Economic Outlook
The Chinese worries seem to have settled a little bit and market participants are starting to shake off their pessimistic views. By why isn’t Mr. USA (US dollar, USD) moving up just yet? Here are some American factors that could contribute to our USDCAD Forex Trading Strategies March 2016:
- NFP numbers were good. But the details not so much: Mr. USA jumped for joy briefly on Friday as the Non-Farm Payrolls (NFP) headlines showed strong numbers. However when traders took a closer look with a magnifying glass, they noticed some setbacks. The average weekly earnings declined despite the minimum wage increases in a couple of states. The mining and manufacturing sectors also saw job losses instead of gains. So Mr. USA had to sit back down and wait for yet another positive set of data.
- Rate hike unlikely to happen any time soon: While the market pessimists and Doctor Dooms Days of January have quiet down, many investors still doubt the next fed rate hike to happen anytime earlier than November 2016– Until we see consistent growth in job creation and improvement in wages. The Fed will likely stick to its wait-and-see routine and avoid any commitment to raise its rates before that. The question is, how long can the Fed wait before the calls for a rate hike become too loud to ignore?
- GDP and Retail Sales have improved: On the bright side, US Q4 revised GDP up 1.0% comparing to the 0.4% growth expected in January. U.S. retail sales also rose in January for a third month. These draw a beautiful long term outlook for the US.
Summary: The US economy is doing well. However the numbers are not too exciting to get the USD moving up. A lot of USD strength was already priced in the end of 2015 prior to the rate hike, and now Mr. USA is trying to chill a little bit before showing off her next big move. Short term USDCAD forex trading strategies March 2016 could be driven by Chinese data as well as weekly jobless reports.
3- USD/CAD Technical Analysis
Now that we’ve crushed the fundamentals, let’s see what the technical point of the Invest Diva Diamond suggests for USDCAD Forex Trading Strategies March 2016:
Big Picture Monthly Chart: We have previously talked about the long term Double Bottom pattern on the USD/CAD monthly chart. It started its formation all the way back in 2002. That’s 14 years ago girlfriend!
When it finally broke above the neckline at 1.2950 back in July 2015, we were quit sure that the pair would continue its journey up to complete this pattern, and it did! We earned a good amount of pips until the pair topped out at 1.47.
Then came the inevitable pullback that has continued in the past two months. The pair is now approaching the neckline of 1.2950, which also happens to fall right on the new 61% Fibonacci retracement level. A break below this level could signal a trend change, and mark the Double Bottom pattern completed.
However if the level holds, we could see this as a temporary pullback in the pair’s journey. Mr. USA and Ms. Loonie could dance back up to resistance levels of 1.47 or even higher.
With the BOC rate statement coming up, we could expect volatility around this level with long-term and short-term support set at 1.2950. The Bullish Engulfing candlestick chart pattern could be a minor bullish reversal signal, however it is not yet strong enough. It needs to be backed up by other fundamental/ technical indicators to make us want to change USDCAD forex trading strategies March 2016.
4- USDCAD Forex Trading Strategies March 2016
As a savvy Invest Diva student you should already be able to put the two and two together and come up with the USDCAD Forex Trading Strategies March 2016. But for our newbies and first time visitors, let me elaborate.
We are currently trying to decide whether the recent drops in the USD/CAD pair have been a result of a technical/ fundamental pullback, or if the trend has reversed and we could expect the pair to continue on a downtrend for the remaining of 2016.
Bearish scenario: Supported by the 50% Fibonacci level, the USD/CAD pair needs to break below both 1.3260 and 1.2950 for a trend reversal to be confirmed. Currently many fundamental and technical indicators are pointing to further drops. However the pair has entered an oversold zone and formed a bullish engulfing reversal candlestick pattern on the daily chart. The combination of these is projecting mixed signals.
Bullish scenario: We would need a WAY stronger US dollar for this to happen. Not to mention a drop in oil prices and bad news/ rate cut signal from BOC. From a technical point of view, the pair needs to break above the pivot zone and the Ichimoku cloud. If all these signs align, we could bring the long term bullish scenario back on the table, targeting 1.50.
Remember depending on your portfolio, your financial goals and trading personality, the above scenarios could produce different results. Choosing either scenario, you would need to maintain enough margin in your account so a massive move against you won’t wipe out your account. These are precisely the stuff I’ll teach you in our weekly investing coaching lessons.
Here are the important long-term levels to keep in mind for USD/CAD.
|Support Levels||Turning Point||Resistance Levels|
I’m also looking at Euro, AUD and GBP crosses this week as we may see interesting new developments in their movements. Join me for an overview this week.