The Canadian dollar is trading modestly lower in early trade after trading stronger against the dollar post-FOMC and taper announcement from the Federal Reserve. The US dollar lost its momentum with the lack of follow through during the end of the week, falling from another three-year high.
However, the bearish sentiment on the Canadian dollar is more than likely to follow into the new year and push USDCAD through 1.0800. Discouraging data out of Canada is continuing the weak currency as recent consumer prices fall below the Bank of Canada’s two percent inflation target. Also, the Federal Reserve is the first major central bank to begin pairing back quantitative leasing, and this is giving indication that the US economy is continuing to outpace Canada. That’s hurting the loonie.
“Our suspicion is we see a temporary respite in U.S. dollar-Canada up-move before it resumes in the New Year. It’s not as if we have a strong Canadian dollar, but we’re off the recent lows,” said Camilla Sutton, head of FX strategy at Bank of Nova Scotia.
Since Bank of Canada (BoC) Governor Stephen Poloz took office on June 3, the Canadian dollar lost 3.4 percent against the dollar and 3.6 percent against nine developed nations currencies.
Price action on the daily chart shows a upward trending channel but pulled back on dollar weakness. Support can be found at 1.0605 prior to the support trend line, whereas a break of the 20 EMA and supporting trend line could send price action to 1.0560. Price action resistance will be found at 1.0700 prior to retesting the high of 1.0736.
After the 100 pip decline from the highs, the ADX momentum gauge is starting to show weakness in the currently move with the +DMI stabilizing. The RSI is also beginning to tick upwards through 57.
If the daily is extended out four years, we can see the high of 1.0853 and how it relates to current levels. If price action is able to retest and break the current highs, USDCAD will see one more line of historical resistance at 1.0746 before moving through 1.0800. The channel’s resistance trend line is just under this level, and it is expected to be a challenging to close above these levels.