The US dollar is holding its ground and refusing to go lower. The prices of oil have stabilized around the year’s highs, but COVID-19 could once again destroy demand. The retail sentiment is unsure of which way things could play out which means a breakout to the upside on the USDCAD could occur on dollar strength with a headline news event. This could be as early as Wednesday when the FOMC meeting ends.
Forex Analysis – USDCAD
USDCAD's daily chart could be pointing toward a bullish extension to the upside this week. We will learn from the FOMC on Wednesday how they plan to handle the current economic environment, and I am sure the US dollar will benefit in the long run. The USDCAD pattern looks somewhat like a cup and handles pattern, though technical analysts probably prefer a cup with a more rounded base.
The cup and handle chart pattern resembles a cup and handles when the cup has a rounded "u" shape and the handle has a slight downward drift, like a bull flag. By measuring the distance between the bottom of the cup and the pattern's breakout level and extending that distance upward from the breakout, a profit target can be determined. The trader's risk tolerance and market volatility may determine whether stop-loss orders should be placed below the handle or below the cup.
The key takeaway is that the 1.2750-1.2800 region has been tested several times this year and a breakout to the upside seems likely if the price of oil falls and the US dollar appreciates. The Fibonacci extension would provide targets to the upside of 1.3200 and 1.3800 when using the high of the initial impulsive move to the low of the most significant pullback. 1.3570 would be the measured move of a breakout of the cup and handle pattern in a traditional sense.
The ActivTrades sentiment indicator shows both an oil and USDCAD market with a fairly balanced directional bias, so I am using technical for direction and confluence from the other key markets.
The oil market is tight and there is a worry that the amount of oil available may not be enough to meet demand under normal global economic activity. The big unknown is how long the COVID-19 variants will cause disruptions. The demand destruction from lockdowns and restrictions of movements was the initial cause for concern in 2020 and we still have an element of that now. The UK government decided to issue a dire warning of a ‘Tidal Wave’ of Omicron coming towards the UK this winter and that we should all get a booster jab of the vaccine. OPEC+ are pushing for more output increases in January as decided at their last meeting and President Bidens administration is selling off some of their Strategic Petroleum Reserve.
There could be 18 million barrels of oils released from the SPR on December 17th from the USA. Whether or not the other countries who pledged to do the same will follow through with their announcement back in November. Saudi Arabia released their most recent economic report today and it shows that they are expecting to have a budget surplus run into next year after several years of deficit. The higher average price of oil in 2021 is suiting them, and this would no doubt encourage them to maintain discipline amongst the OPEC+ nations to not flood the markets with a glut of oil.
The US dollar index has just rolled to a new contract and is looking very bullish today. The US dollar, pound, and yuan are the strangest currencies relative to their peers this morning, whereas the euro, Aussie, and CAD are the weakest currently. If the US dollar index chart is forming a bullish pennant formation a breakout to the upside of the overhead resistance would be the start of a continuation higher. The price target for pennants is often established by applying the initial flagpole's height to the point at which the price breaks out from the pennant. With the flagpole on this chart starting around the $94.00-$94.50 lows, we could be in for $100 on the DXY if this pattern does play out.
The USDCAD h1 chart shows that the price action is now back above the 20, 50, and 200-period EMA’s and is back within a range set between the end of November and the start of December. It would be quite hard to initiate a long whilst we are within the 1.2700-1.2850 zone, but should there be a breakout of this area, I will be looking for a pullback to the breakout or to the moving averages as a buy the dip opportunity.