3 reasons USD/CAD should be lower. What’s next for the pair?
USD/CAD has been trading in a range since January 27th between 1.2636 and 1.2797, roughly 160 pips. That’s nice for traders who like to range-trade. However, there are several reasons that the pair should be trading lower. Below are a few of those reasons:
- CPI:Canada released CPI data earlier today. Like so many other countries these days, the January inflation data was higher than expected.Expectations are were for 4.8% YoY.However, the headline print came out at 5.1% YoY. The Bank of Canada meets on March 2nd and expectations are for a 25bps rate hike (its first).With a rate hike on its way and inflation over 5%, traders may think the Canadian Dollar should be stronger.
- Oil: On January 11th USD/CAD broke below the neckline of a head and shoulders pattern near 1.2600.At the time, WTI Crude oil closed near 81.25.Today, Crude oil is trading in the 92.00/95.00 area and USD/CAD is higher, near 1.2700.Clearly the Canadian Dollar hasn’t been following Crude Oil for the past month.
For more analysis on Crude Oil, see Geopolitical tensions, tight supply, strong demand drive oil higher )
- DXY: On January 28th, the DXY made a high of 97.44 and traded lower for 5 straight days.Since that date, the DXY is lower by nearly 1.75%. USD/CAD also made a near-term high on January 28th, but only pulled back for 3 days.Since then, USD/CAD is only down 0.8%.With the US Dollar Index down as much as it is during the last few weeks, USD/CAD traders may thing USD/CAD should be lower as well.
What is the US Dollar Index (DXY)?
On a daily timeframe, USD/CAD broke below the neckline of a head and shoulders pattern at 1.2600 on January 11th and began moving towards its target of 1.2250. However, the move was thwarted by several hammer candlesticks between January 13th and January 20th, which helped priced to reverse. USD/CAD then went bid to the 1.2797 high, negating the head and shoulders pattern. The pair has been trading in the previously mentioned range since.
Source: Tradingview, Stone X
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Since USD/CAD isn’t pushing lower for the reasons given above, what happens if any of those themes change? What happens if the BOC doesn’t hike and sees inflation slowing? What happens if oil reverses and moves lower. What happens if the DXY moves higher? If any of these happen, USD/CAD could move aggressively higher.
First resistance is at the January 11th highs of 1.2797 then the January 6th highs at 1.2814. Above there, USD/CAD can run up to the highs of the head of the previously mentioned head and shoulders pattern from December 20th, 2021 at 1.2964. Long-term horizontal resistance is just above there at 1.2990. If USD/CAD finally does break lower, support is at the February 10th lows of 1.2636. Below there is horizontal support at 1.2570 and the 200 Day Moving Average at 1.2532.
There are several reasons that USD/CAD could be lower, but it’s not. Therefore, if any of the above-mentioned circumstances reverse, USD/CAD could move aggressively higher in a hurry!
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