USD to CAD Rate Forecast to Break into a Long-Term Bear Trend

Charts are showing the US dollar could be about to cross an important technical Rubicon against the Canadian Dollar which if concerned will confirm the mult-year advance is over.

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The USD to CAD exchange rate has been on the rise since October 2012, around about when the US dollar embarked on a multi-year cyclical appreciation.

The peak in the exchange rate came at 1.4690 in January; a time when markets were betting on four interest rate rises at the US Federal Reserve in 2016. Now markets are only betting on one rise in the face of a slowing US and global economy.

The reversal in fortunes for the US dollar, and a CAD-supportive recovery in oil prices, has allowed USD/CAD pair to push below a key support level at 1.2831.

To us this signals a probable reversal of the longer-term up-trend, and the potential for more declines on the horizon.

We continue to watch for a sustained break of this key level 1.2831 at as it will translate into further bullishness for CAD and weakness for USD.

The 1.2831 level corresponds to the October 2015 trough low, and a break below that means the structure of the market has altered significantly, as the down-trend is now composed of both lower highs and lower lows, whereas previously that was not certainly the case.

This could signal a major trend-change for the pair.

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The exchange rate penetrated the level on Tuesday, and closed below it on a daily basis, which strengthened the bearish significance of the break.

As Shaun Osborne from Scotia Bank points out:

“USDCAD pushed under key support (now resistance) at 1.2834 Tuesday and held the break on a closing basis. The broader downtrend persists..”

It now remains to be seen if the break can hold for a little longer:

“At the moment, price action looks like a minor consolidation ahead of another push lower. But a daily close back above 1.2834 could drain the move lower of some negative momentum in the short-run at least and might imply a “false break” of key support.”

Scotia’s base case, however, is for more downside:

“We still rather think a clean and sustained break below 1.2834 means USDCAD’s focus is shifting to the 1.20/1.25 range in the next few months and we prefer to fade modest USD gains.”

Indeed, Currency Watch’s own target is at the S3 monthly pivot at 1.2541. A break below 1.2710 would provide the confirmation for such a bearish move.

Momentum indicators are not overstretched to the downside, with RSI still above oversold.

MACD in the lower frame has been drifting higher since the March 18 lows suggesting the down-trend is losing momentum, but it remains below its signal line in bearish mode.

Bank of Canada (BOC) Keep Rate Unchanged and Marginally Upbeat About Economy

The BOC had their April rate meeting on Wednesday and decided to keep their rates unchanged as the majority of economists had expected.

Overall their rhetoric was marginally more upbeat about the economy, and they revised up growth prospects for 2016 (from 1.4% to 1.7%) although slightly revised them down for 2017 (from 2.4% to 2.3%). First quarter GDP growth was unexpectedly strong.

BOC still saw cuts to investment in Canada’s energy sector despite recent gains in crude oil.

They saw the output gap closing in 2016.

Debate about CAD heats up

The Canadian Dollar has been the focus for much debate recently with big-name analysts taking opposing sides of the argument about what it should be valued at.

HSBC’s David Bloom, made headlines recently arguing that the Canadian Dollar should never have fallen as deeply as it did in 2015. His argument was based on the fact that the Canadian Economy is not as reliant on oil for its revenue as Russia or Norway, but it has nevertheless been treated by investors as the same.

Despite already pulling-back 26% of its value versus the dollar, Bloom still sees more potential for the loonie to recover further stating 1.25 as a possible level to reach.

The view is opposed by heavy-hitter Danial Hui and his team at J P Morgan, who suggested CAD will retrace its steps versus the dollar, when investors become aware of the Federal Reserve’s intention to start raising interest rates again. J P Morgan’s base case is for two more interest rate hikes in 2016, whilst the market is currently not pricing in any.

BNP Paribas also see loonie strength as having over-reached itself, primarily as a result of short-covering from the previous 2015 down-trend, which they argue has exaggerated the recovery by at least 2-3%. This they claim is expected to be recouped imminently.

Short-covering happens when a currency which has been in a sharp decline suddenly surprisingly reverses and investors who have been speculating on it falling are caught unawares and find their positons losing money. This leads them to close their trades in a panicky rush, which accelerates the currency’s recovery, adding fuel to the up-move and sometimes distorting it.