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Will the daily USDCAD support hold?

The US dollar is trying to punch higher having found support, and oil is at resistance, which could be the ideal situation for the USDCAD to form a base and rise higher. This will please the retail cohort as they are extremely long.

USDCAD Forex Analysis

This week is a big week for the US dollar and the US economy.

Today we received information regarding the preliminary estimates for the US GDP which shows a modest uptick in growth for the Q2 2021 though under analysts’ expectations moderately. The Bureau of Economic Analysis report states:

“The increase in second-quarter GDP reflected the continued economic recovery, reopening of establishments, and continued government response related to the COVID-19 pandemic. In the second quarter, government assistance payments in the form of loans to businesses and grants to state and local governments increased, while social benefits to households, such as the direct economic impact payments, declined.

This shows that fiscal flows are still going into the US economy and this, in turn, will lead to continued support for the markets. With a safety net under the economy businesses and banks will be happier to invest and that should be where the economic drive comes from. As the economy opens the need for commodities like Oil becomes greater and we have seen the oil markets move 62.3% off their lows last year.

Oil has weathered the OPEC+ 2021 disagreements and is continuing with its production increases with everyone on board with the current arrangement. The USA has asked for OPEC+ to cover a shortfall in supply as demand increases but the oil nations are not willing to oversupply during the uncertainties due to COVID-19 disruptions.

The ActivTrades sentiment indicator is moving towards being extremely positioned to the upside, just as the price action comes into some confluence of resistance. If the retail traders are correct in their assessment of the direction of oil, and assuming price can carry on traveling higher, the likelihood of the USDCAD to go down is high.

This week we also learn about the Federal Reserve’s view on how or when they are going to start tightening monetary policy. They are currently doing $120bln of QE and an extraordinary amount of Reverse Repo’s which in my mind are counterproductive to each other. It would make more sense for the Fed to reduce asset purchases and stop with the reverse repo facility. However, tomorrow Fed Chair Powell will give the markets something to work with, and currently, the consensus is for tapering to start in November. The risk event is that they don’t do enough, any at all, or come out and do too much, and with the mid-term elections coming up and Chair Powell keen to do a second term, the language around tapering will no doubt be very balanced.

The US dollar is likely to reprice on any news of tapering with most analysts expecting the US dollar to rise as yields rise.

The US dollar index swept the swing highs from March and is now in an uptrend momentum with the daily exponential moving averages all indicating higher prices. If the US dollar does rise that is bad for the commodity space and the price of oil should come lower. With this set of events the USDCAD would end up being stronger and we should see price appreciation.

Generally, I like to fade the retail sentiment when it gets this extreme as the traders are generally wrong. But currently, they are following along with, stronger US dollar, weaker oil which results in higher USDCAD prices. Comparing the 2 sentiment readings one set of traders is clearly wrong. It is very unlikely that the USDCAD would go higher in tandem with higher oil prices.

The USDCAD weekly chart is showing that the recent visit to previous support is now acting as resistance but as it failed to reach the 1.3000 big figure, there could be many stops up there which would be a source of liquidity for anyone who was long from the previous sweep of the swing lows to get out of their position.

The daily chart for the USDCAD is indicating a possible bounce off the 3 daily ema’s which could be acting as dynamic support, just as the dollar index did earlier this year. A move below the daily 200 ema would be a real signal that the longs were not ready to press for higher prices and momentum could turn downwards quickly.

On the H4 chart, there is a rising trend line with currently 3 clear touches which should it break, we would be on the lookout for a retest and continuation lower trade.

A lot hangs in the balance and it is probably best to wait for Monday before entering a trade as the overall picture could be very different and hopefully more decisive. What we will be looking for is a fundamental reason why the US dollar goes up or down, and from there we can work out how to trade the USDCAD and oil, as CAD and oil have an inverse relationship to the direction of the greenback usually. Personally, I will be looking for USDCAD to come down and break that rising trendline on the H4 as the longer-term trend for the US dollar is to the downside and there is a shortfall in the production of crude oil making a tight market. So, if that does happen the Breakdown-Retest-Continuation trade will be my next move.