The recent policy moves by the Bank of Canada, took market participants by surprise, as they not only decided to cut their QE entirely, they stated that they are looking to raise rates by 125 bps in 2022. This is bullish for the Canadian dollar and that combined with a tight oil market are going to keep the CAD prices supported for longer.
EURCAD forex analysis
I know we are supposed to buy low and sell high, but the recent downfall of the EURCAD is nowhere near the relative lows on the higher time frames, so there is still room for the downside to come.
On a monthly chart, the EURCAD has clearly broken a major trend line and is looking for swing lows to see if there are any buy stops and liquidity. I am not sure they will find any and these stops will be run, possibly all the way down to 1.2000 if the price of oil goes towards $100 per barrel. But that could take some time.
Not only are technical reasons piling up for a decline in the EURCAD, but the fundamentals are also stacking up for bigger divergence between monetary policy, with the Canadian central bank actively becoming more Hawkish and the European central bank currently Dovish.
If the Bank of Canada were to raise interest rates above the current 0.25% by any number of basis points, let alone 125bps, it would just keep pushing the gap wider between euro rates and Canadian rates wider. Currently, German bunds are negative, and the ECB rate is 0%.
The ActivTrader sentiment indicator is showing that a worryingly high percentage of retail traders are wanting EURCAD to go higher. This is the time for more savvy traders to look for the areas where stop orders are most likely sitting as targets to the downside.
On the daily chart the next swing low likely to get tested is from February 2020 at 1.4260, which is where anyone long may have a chance to get out of their longs on a bear market rally or dead cat bounce. The 1.4505 level was where the most recent breakdown occurred, so a test of that trend line and the daily 50 ema is still likely.
For the 98% of retail traders to be correct and for the EURCAD to rise from these levels, we would have to have a more Hawkish tone from the ECB, so maybe that happens today at the ECB meeting press conference. Though President Lagarde has stated that the ECB regards the rising inflation as temporary and due to the rise in Oil prices from 2020. It is true that they, like other central banks are worried about rising inflation. Also, there is a chance that the Iranian nuclear talks do resume in November and that brings Iranian oil online sooner, which would scupper the rise in oil prices towards $100 per barrel for now.
For now, I am going to look to fade the sentiment indicator and any test of old support that becomes resistant on the EURCAD daily chart will be a signal to get short. Stops would go above the recent swing highs and therefore a profit target would be calculated using a risk to reward ratio of 1:2.