US Dollar to Canadian Dollar Resuming Downside, 1.2832 Watershed in Sight
USD/CAD has started falling again after a brief respite.
The USD/CAD pair has resumed its short-term down-trend by falling below the 1.2922 lows of March 18.
The release of crude oil inventory data from the International Energy Agency on Wednesday March 30, showed a deeper-than-expected fall in inventories, suggesting demand had outstripped supply, which helped Oil futures rise by over 3.0% and the Canadian Dollar to surge too. CAD is highly correlated to oil which is a major export for the country.
Recently USD/CAD had corrected higher in an a-b-c move which reached its zenith at 1.3295 on Thursday 24, but then the pair started going down again, retracing the whole correction and now has also breached below 1.2922.
It remains out base case that this break will probably open the way to a continuation down to the October 2015 trough lows at 1.2832.
The October low is a significant ‘Cerebrus’ guarding access to more downside.
A break below it would add a heavy weight to evidence that the longer-term trend had changed from bull to bear market, and would change the whole structure of the market on a broader view.
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A definitive break below - confirmed by a move below 1.2790 - would almost certainly open the sluice gates to a break down to 1.2500, and possible even lower to the S2 monthly pivot in the 1.24s.
Westpac Not So Sure
Not all analysts are so certain about the bearish trend continuing down to below the 1.2832 lows.
Australian bank Westpac, for example, argue the Canadian Dollar is running out of reasons to continue rallying:
“Catalysts for fresh meaningful downside in USD/CAD are running out - crude oil seems to have found a ceiling around $40/bbl while
PM Trudeau's pro-growth budget is now priced-in and out of the way.”
Westpac expect a major reversal to occur at the October ’15 lows at 1.2840:
“We look to buy USD/CAD on a good pullback at 1.2840 with a stop at 1.2710.”
The Aussie bank looks to trade up to a “modest” target between 1.34-5.
They see risks of weakness for the dollar, however, resulting from more poor US data cancelling out an expected June interest rate raise:
“Weak durable shipments and spending data have put Q1 growth estimates in freefall, informed forecasters stripping a good 1ppt off Q1 in barely a couple days to the 0.5-1.0% range. If confirmed by more soft data in coming weeks Chair Yellen's caution will be validated and a June hike would be off the table given the time needed to rebuild confidence in the outlook, not to mention the proximity of the UK referendum in June.”
Nevertheless, they urge caution not to get trapped into expecting a dollar capitulation, as regional Purchasing Manager Data has been good recently pointing to a regenerative spurt:
“All told not an inspired USD outlook but we won't get carried away. DXY downside shouldn't extend beyond support levels into 93-94. Recent weak hard data has been a Jan/Feb story yet since then US financial conditions have eased sharply and all regional PMIs have risen strongly.”
In summary, 1.2830-40 is likely to be a major watershed level looking ahead, which could hold the key to the next major directional move, whether its back up as Westpac suggest or till further down as the dominant short to medium term trend stresses.
