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USDCAD is deeply oversold

The trend is to the downside, but nothing falls forever. Neither does it go up forever. Traders have not taken any meaningful profits in the 15-month downtrend in the USDCAD and a lot of that will be to the resilience of the energy markets and the depressed prices in the US dollar. Today could be a turning point as could next week’s FOMC, but all I am looking for is a quick jump higher to maybe test the previous months high or at least find significant resistance from some market structure.

USDCAD Forex Analysis

The USDCAD’s move from the pandemic high in 2020, to the current month-long consolidation at the 2020 lows suggests to me, that the Loonie is oversold. On a monthly chart, we haven’t seen a meaningful correction represented by new monthly highs, (not even a sweep of a monthly high) in the last 15 months.

However, we did sweep the September 2017 lows this May and have found some bullishness at the 1.2110 level, which may be one of two things. Either the traders who got long in 2017 are still present or maybe they have been replaced by new traders who see this level as value. Or those traders who rode the price down from 1.4650 to 1.2110 are taking some profits, finally!

The Bank of Canada (BoC) announced their current monetary policy yesterday, which disappointed those traders looking for some tapering from the BoC but cheered traders who took the bank's optimism as a good omen for the summer months ahead. The BoC governor Macklem said,

“With vaccinations proceeding at a faster pace, and provincial containment restrictions on an easing path over the summer, the Canadian economy is expected to rebound strongly, led by consumer spending.”

The USDCAD had been trading lower on the day pre-BOC announcement but shot higher to a peak of 1.2117. Today’s price action at the start of the London session has seen yesterday’s high get taken, so that is a bullish signal in itself, but the important US CPI data is out later today, so this bullishness could potentially get reversed. The key would be to wait for all the data to be released this afternoon and then try and buy or sell on some sort of pullback, once the directional move out of the range has taken place.

If the US dollar were to weaken, the next level of support for the USDCAD is around 1.1910 and then 600-700 pips lower around the 1.1200 which was the 2014 breakout level. This type of action would require the US dollar to depreciate a lot more and for the Oil markets to keep rising, while also expecting the coronavirus disruptions to dissipate. So not impossible, but quite unlikely in the next month or so.

If we draw a line from the swing low of 2015 and join it to the swing low of 2017, we have a decent target to the upside for a retracement in June. The confluence of that trend line, plus price moving into the daily Ichimoku cloud would be a good reason to expect resistance at or below the March 2020 swing low. This also would allow the market to trap even more retail traders who would most probably put the stops under the May/June swing low prices who would then puke on a retest lower.

With the unlikeliness of a much greater decline today, I am edging towards some sort of retracement of the 15-month downtrend, but that means I have to fall in line with the vast majority of retail traders.

On the ActivTrader sentiment indicator, 91% of traders are bullish the USDCAD, which is a red flag to anyone who uses this indicator as a contrarian viewpoint. Maybe they get a few days in the sun before the US dollar finally collapses.

The RSI has over the last month moved back towards the midline, having failed to fall lower with the swing lows in price. This is also a bullish sign as that indicates divergence of RSI to price.