USD/CAD Technical outlook: Is it time for a long-term change in trend?
Joe Perry January 20, 2021 11:44 PM
A weaker price on a in crude oil on the weekly chart would suggest a stronger USD/CAD on the longer-term timeframe!
As with any currency pair, there are an abundance of factors to consider when trying to forecast price. Those factors can be broken down into technical factors and fundamental factors. On the technical side, price action is paramount. However, for USD/CAD, one must also include the correlation between USD/CAD and crude oil when considering price movement. Crude oil is a key export for the Canadian economy; therefore, it is important that we also consider the price movement of USD/CAD.
On a weekly timeframe, USD/CAD has been moving lower since its pandemic highs at 1.4667 in March 2020. The downtrend is still intact; however, the pair may be ready for a bounce. Since late September 2020, USD/CAD has been forming a descending wedge, and is currently nearing the apex. A descending wedge would suggest a breakout to the topside, with the target being a complete 100% retracement of the wedge, near 1.3410. In addition, price is hovering around the support area of the 161.8% Fibonacci extension from the lows during the week of August 31st to the highs during the week of September 21st.
Source: Tradingview, City Index
The trend is still lower, however if USD/CAD breaks higher out of the descending wedge, there will be strong resistance on its way back to target. A downward sloping trendline and horizontal resistance converge near 1.2990 and the 200 Week moving average crosses at 1.3136. Major support isn’t until 1.2061, however this is horizontal support below near 1.2547.
Also notice the correlation coefficient at the bottom of the chart. Dating back to late 2018, most of the time crude oil and USD/CAD have had a negative correlation, meaning the 2 assets have been moving in opposite directions. (This means that the Canadian Dollar and Crude Oil prices have been moving in the same direction.) The current correlation coefficient is -0.91. For reference, a correlation coefficient of -1.00 means that the 2 assets are perfectly correlated and move in opposite directions on a one to one basis 100% of the time. The current correlation coefficient of -0.91 indicates a strong negative correlation!
As mentioned, its important to look at crude oil when discussing the Canadian Dollar. West Texas Oil (WTI) is right in the middle of a strong resistance zone between 50.50 and 54.40. This area has acted an important “decision zone” for traders dating back to 2014. In addition, the 61.8% Fibonacci retracement from the week of October 2018 highs to the March 2020 lows crosses just below at 51.86. The 200-week moving average also crosses in this zone near 52.96. Just above, there is a downward sloping trendline from the October 2018 highs, which crosses near 57.00. And although the RSI is not in overbought conditions yet, its pretty close at 68.81.
Source: Tradingview, City Index
Given the strong correlation between WTI and USD/CAD, IF this resistance zone can hold and WTI pulls back towards horizontal support at 47.20, then it could mean a weaker Canadian Dollar as well. Therefore, a weaker price on a weekly chart in crude oil would suggest a stronger USD/CAD on the longer-term timeframe!
For a technical insight on USD/JPY, click here
Learn more about forex trading opportunities.
This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.
GAIN Capital Singapore Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the GAIN Capital group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), GAIN Capital Singapore Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact GAIN Capital Singapore Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither GAIN Capital Singapore Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.
GAIN Capital Singapore Pte. Ltd. is not under any obligation to update this report.
Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.