By Talking Points:
• Battle Between Consolidation and Reversal
• The Primary Driver of USD/CAD Price Action
• Potential Short Set-up in USD/CAD
Negative RSI divergence and renewed risk sentiment has caused a pullback in USD/CAD that could accelerate, presenting favorable near-term short opportunities in the pair.
The US dollar (USD) has gained strongly against the Canadian dollar (CAD) since September 2013, making higher highs and higher lows while trending all the way up to the 1.12 area. However, in January, USD/CAD reached overbought conditions and we saw a negative divergence between price and momentum, as measured by the Relative Strength Index (RSI).
From the aforementioned highs near 1.12, we have seen a slight correction in USD/CAD…for now.
The move down is mostly based on softer macroeconomic numbers from the US and better risk sentiment in emerging markets, both of which appeared last week. The question now is whether this is only a slight pullback before another leg higher and above the recent highs at 1.12, or if we will see a new trend of lower highs and lower lows in upcoming days and weeks.
It’s interesting to see the RSI below 50 in USD/CAD, and if it settles in at these levels, we might see a near-term pickup in downside price action, which would give some added incentive for traders looking to short the pair.
FOREX: Potential Short Set-up in USD/CAD
Support: 1.10, 1.09, 1.07-1.0550
Resistance: 1.1080-1.11, 1.12-1.1250, 1.15
Furthermore, a key downside level to watch in USD/CAD is the 38.2% retracement from the lows in September 2013 to the recent highs above 1.12, which comes in at 1.0825. From there, we have earlier highs around 1.07 and the broad range (horizontal) between 1.08 and 1.0550. In fact, that 1.055 area is also the 61.8% retracement for the whole uptrend since September. A break and hold below this level would be critical for USD/CAD in the longer-term, as the overall uptrend may then be challenged.
To the upside, we have established resistance in the 1.1080-1.11 area, and, of course, there’s the recent peak just above 1.12. A break above 1.12 would give a new buy signal and offer an objective target of 1.15.
For now, the most likely scenario for USD/CAD would be a new downward trend with lower highs and lower lows, at least to the first retracement support just above 1.08. If we keep getting soft US economic numbers, dollar bulls may begin taking off some of their long USD/CAD positions, but the main driver for USD/CAD might be overall risk sentiment tied to emerging markets and development in China.
Potential Short Trade Idea for USD/CAD
Short half the desired position at the first resistance area around 1.1080. Traders could add more to the short position if/when we see a bearish technical reversal or a move up against previous highs near 1.12. The stop loss should be executed if USD/CAD closes above 1.1250 on the daily time frame.
There are two price targets for this trade, the first being the 38.2% Fibonacci retracement level at 1.0825. If this target is reached, take 50% of the trade off the table, moving the stop loss on the remaining position to the average price and looking for further downside to the second and final price target around 1.07.
By Rafiul Hossain, Guest Analyst, DailyFX.com
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