Commodity currencies received a boost last week due to market speculation that China will begin to introduce a large stimulus program to help boost a slowdown in growth expansion. Market participants are hoping that the potential stimulus would revive demand for raw materials and energy, thus traders reduced Canadian dollar shorts against the greenback by record levels.
Net shorts were reduced by 36,590 contracts as of March 25, according to the commitment of traders data provided by the Commodity Futures Trading Commission (CFTC). This reduction was the most since 1993, while remaining net-shorts stand at 33,215.
Jack Spitz, managing director of FX for National Bank of Canada, said “the market is gearing up for a more stimulative Chinese policy, which would feed into a bid for commodities as well as the related currencies Australian dollar and Canadian dollar.” The Canadian dollar gained 1.5 percent on the week, marking the biggest rally since July. USDCAD has declined from a new multi-year high of 1.1277, made on March 20, to close the week at 1.1057 – a reduction of 230 pips.
Price action has formed into a wedge-like pattern and began to breakdown immediately after the new high was printed. The sharp moves in commodity currencies, and positive Canadian economic data last week, caused the pair to break through the supporting trend line.
Friday’s candle printed positive, but it was rejected at the former support, now resistance, trend line. USDCAD has found support between 1.1000 and 1.0950, and a new trend downward could be in the works. If so, expect price to test 1.0975. This is supported at the yearly high-to-low Fibonnaci 23.6 level and the 72 EMA. The US dollar has been strong of late, but a move lower to 1.0900 is likely. There is also a 20/50 EMA bearish crossover in the works.
However, if price action can trade back into the wedge, upside potential can be seen at 1.1105 to 1.1150. This is a possibility is risk sentiment weakens.