Loonie: Buyer-seller pendulum swinging too far?

So far this week, the trend toward USD (NYBOT:DXU14) strength that had dominated the past few weeks’ trade has taken a breather.

Most major currencies have consolidated in tight ranges over the past four days, with EUR/USD holding steady around 1.3400, USD/CHF unchanged in the mid-.9000s, and AUD/USD inching above .9300; the one exception is the persistent weakness in GBP/USD, which has fallen sharply as traders push back their interest rate expectations in the wake of yesterday’s dovish BoE Quarterly Inflation Report.

While the buck is generally holding its ground against its major rivals, it is quietly slipping against its immediate neighbor to the north. USD/CAD has now dropped to a new August low below the 1.0900 handle. More worryingly, today’s break below the 1.0900 level confirms the early-August double top at 1.0985, suggesting that rates may fall further from here.

Meanwhile, the RSI formed a triple bearish divergence in late July and early August (4hr chart), warning of a potentially important short-term top. The indicator is now trending lower within a downward channel and has dropped below the 40 level that typically provides support within uptrends.

Admittedly, it’s difficult to enumerate a specific fundamental catalyst that could drive the USD/CAD lower. The Fed is clearly, if gradually, shifting in favor of normalizing interest rates while the Bank of Canada remains firmly on hold in the wake of Friday’s disappointing Canadian jobs report. That said, price action often leads fundamental data in the short term, and the buyer-seller pendulum may simply have swung too far in favor of the bulls over the course of July.

Source: FOREX.com

Either way, the short-term technical outlook for the pair has now shifted to the downside as long as USD/CAD holds below 1.0900. From here, bears may look to target the 38.2% Fibonacci retracement of July’s rally at 1.0845, followed by the double top measured move objective at 1.0815. On the other hand, if the pair is able to recover back above 1.0900, the near-term bias would shift back into neutral for more consolidation in the recent 1.0900-1.0985 range.

About the Author
Matt Weller

Senior Technical Analyst for FOREX.com. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, Matt creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Matt is a Chartered Market Technician (CMT) and a member of the Market Technicians Association. You can reach Matt directly via e-mail (mweller@gaincapital.com) or on twitter (@MWellerFX).

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