Have The Canadians Forced The U.S. Dollar Onto Its Back Foot

by: Sandeep Singh Ahluwalia

Bank of Canada left its interest rate unchanged at 1.5%.

Canada’s employment level rose to 6% in August from a prior value of 5.8% in July.

In the approaching days, the Canadian Dollar shall be kicking the US Dollar six ways to Sunday.

In my last article, I was bullish on the US Dollar (UDN) as I expected it to rise to the 1.3156 mark. This came true as the greenback rose against the Canadian Dollar (FXC, CADS), which resulted in it closing last week at 1.3163. Hence, in this article, I shall look at the likelihood of the greenback falling against the Canadian Dollar to the 1.2949 mark. Thus, to establish the likelihood of this occurring, I shall look at the fundamental news affecting the pair whilst also analysing the charts using technical analysis tools.

Fundamental news:

  • Canada’s interest rates:

The Bank of Canada as anticipated kept its interest rate unchanged at 1.5%. This news was well received by the market as it provides the Canadian economy and dollar with much-needed stability. I say that as a change in rates would have caused a knee-jerk reaction in the currency, which would have been unfavourable for the Canadian Dollar bulls. Hence, the rate staying the same shall give the Loonie a shove in the right direction.

  • Canada’s job statistics:

The latest Canadian employment report was rather disappointing as the level of unemployment rose to 6% in August from a prior value of 5.8% in July. However, even though the data was disappointing, I do not see it weakening the value of the Canadian Dollar as the market had anticipated an increase in unemployment levels, as analysts had pegged it at 5.9%. Thus, this news has already been factored into the price, which, reaffirms my notion that the Canadian Dollar shall be strengthening against the Greenback.

  • Trade tensions:

The ongoing placement of tariffs on Chinese imports has provoked a reaction from Japan’s Economic Minister Toshimitsu Motegi. The minister stated that the United States and Japan have numerous differences in their opinion about trade. However, Japan shall make a wholehearted attempt to overcome these differences through further discussions.

However, investors are now worried that President Trump may turn his tariffs focus on Japan. If President Trump does this, then he shall severely affect the value of the US Dollar as America will lose its special relationship with another Asian partner. I say that as President Trump has already sparked trade tensions with India and China, thus, him attacking Japan will be equivalent to him shooting the Dollar's leg.

Technical Analysis:

Daily chart:

USD/CAD Daily Chart The pair’s daily chart indicates that in the approaching days, the Canadian Dollar shall be kicking the US Dollar six ways to Sunday. I say this as the US Dollar failed to break out above a key resistance level at 1.3190. Moreover, I expect this as there has been the formation of an evening star pattern between 4th and 6th September.

The first green candle in the pattern indicates to traders that the bullish trend is in force. However, the next candle’s real body warns us that the bullish momentum is weakening. This was then confirmed by the last bearish candle which showed traders that the bullish rally has stalled. Moreover, the final nail in the bull’s coffin was put yesterday as the US Dollar managed to fall below the cloud formation on the hourly time frame.

On the price target front, the greenback has currently taken support from the 78.6% Fibonacci level at 1.3054. However, I expect the US Dollar to fall to the range between the 100% to 127.2% support levels. The 100% Fibonacci level is at 1.3008, whilst the 127.2% level is at 1.2949.

On the indicator facet, the RSI is in sharp descent which has resulted in it tumbling below the 30 mark. This clearly reinforces the fact that a bearish continuation is on the cards. Moreover, the ADX values have perched at an identical spot thus, demonstrating to investors that the bearish trend strength is here to stay.

Weekly chart:

USD/CAD Weekly Chart The pair’s weekly chart has been trading in a tight box range formation for the prior 11 weeks, which has resulted in a lot of frustrated traders. However, we can expect a bearish continuation in the coming week due to the formation of a dark cloud cover pattern. The prior green candle in the pattern relays to us that the bulls are in complete control. However, we know that this is not true, as the tide has turned due to the current bearish candle closing inside the first candle's real body.

On the support front, the US Dollar has presently taken support from the 78.6% Fibonacci level at 1.3054. However, I expect it to tumble to the 127.2% level at 1.2949. But, if the fall does not culminate at this level, then the greenback shall plunge to the 161.8% level at 1.2874.

The Big Picture:

In conclusion, I am leaning towards the bears being in the driver's seat. This notion of mine is fuelled by the fact that the technicals currently support a descent. However, whichever way you decide to trade, do ensure that you utilise trailing stops, as this shall aid in capital preservation, which is of prime importance.

Good luck trading.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.