Canadian Dollar Talking Points:
- While the US dollar has suffered losses against currencies such as the Euro and the British Pound, USD/CAD has fared well in comparison.
- So far, the 1.4500 level has continued to restrain bullish breakouts, laying the groundwork for potential mean reversion in the long run. But first, bears would need to remove higher-low supports, which they appear to have failed to achieve despite abundant chance.
- Given the tense tariff situation and an oversold DXY, bullish breakout potential cannot be ruled out, but the larger question on the long-term range is the monthly close, as described more below.
In my perspective, technical analysis isn’t particularly good at predicting new occurrences. This may sound oxymoronic as a lead statement in a forecast post, but we might as well address the elephant in the room. Technical analysis is a review of the history, and as such, it can only be used to extrapolate the past to prospective future events.
So, if the past does play a role in how the future unfolds, as the whole ‘history may not repeat, but it can surely rhyme,’ then using historical waypoints can be useful in strategizing with that asymmetry in mind. And for traders, I believe risk management is more important than prediction. Where technical analysis fails is in forecasting new ‘things.’ You can utilize technical analysis to identify breakout potential, as I did in late January. At the time, Canadian tariffs were slated to go into effect on Saturday, and the pair had already reached a new high.
However, predicting the exact top or bottom is unrealistic, in my opinion, and I believe that the inability of the past to properly predict the future is one of the key reasons that some traders detest or dismiss technical analysis.
I’ve been highlighting the pair’s nine-year range since November, when the tariff issue first surfaced and USD/CAD struggled to stay above 1.4000. Normally, with a range of this magnitude, the wide expectation is for continuation, and that is exactly what has happened over the last three and a half months.
USD/CAD Monthly Chart: Range
Since the USD/CAD rise in early February, a digesting pattern has emerged in the pair. The psychological level of 1.4500 has continued to loom big, thwarting two distinct bullish breakout attempts.
Normally, that would be a bearish indicator, especially given the longer-term chart seen above. However, higher-low supports have held since each retreat, dating back to mid-February, which contradicts this thesis. The last six weeks of price activity can be depicted as a symmetrical triangle with both lower-highs and higher-lows; generally, this does not indicate a directional bias.
However, when combined with the previous bullish trend, the triangle might be termed a bull pennant formation.
The last six weeks of price activity can be depicted as a symmetrical triangle with both lower-highs and higher-lows; generally, this does not indicate a directional bias. However, when combined with the previous bullish trend, the triangle might be termed a bull pennant formation. At this moment, there are many unknowns surrounding Trump’s tariffs on Canada, the least of which is the connected impact. I’ll attempt to work through that below, but there are a lot of ‘what ifs’ and’maybes’ to consider.
So far, the premise of tariffs has had a negative impact on the CAD and a positive impact on the USD, and rationally that makes sense because tariffs in the US could possibly bring higher levels of inflation, which could demand ‘less-dovish’ monetary policy from the Fed; however, there’s also the impact to Canada, which heavily relies on exporting to their southern neighbor, and that economic weakness could bring with it the need for even softer monetary policy, such as we’ve seen of late.