Weekly Recap and Outlook for USDCAD - 7/19/2010

Written by ForexTraders.com on July 19, 2010 at 3:43 PM ET

USDCAD consolidated after the previous week's sharp decline as the Greenback strengthened against the commodity currencies on increased risk aversion. The pair started the week on a positive note on Monday as the BOC released its Business Outlook Survey. The survey, which began in 1997, revealed that its indicators were at historic lows since the survey began. The Canadian firms surveyed expect growth to decrease over the next year.

On Tuesday, the rate declined after the Canadian Trade Balance came out with a deficit of -0.5B versus a consensus of a flat reading. On Thursday, USDCAD started rallying sharply, with Canadian Manufacturing Sales improving to 0.4% - just slightly higher than the 0.3% consensus rise, and with the previous reading revised upwards from 0.2% to 0.4%. Also on Thursday, Canadian New Vehicle Sales showed an increase of 0.2% versus a decline of -0.1% expected.

Friday saw the rate make its weekly high of 1.0556 before trading down to close at 1.0545, up 2% overall for the week.

Fundamental Outlook for USDCAD

The primary market-moving economic data releases and policymaker speeches scheduled for this week in Canada and the United States are as follows:

Canada:

Canadian economic releases for the upcoming week heat up considerably, featuring the key BOC Rate Decision on Tuesday in which a rate hike is anticipated.

Monday starts the busy week out with the release of Foreign Securities Purchases (8.05B), followed on Tuesday by the highlighted BOC Rate Statement in which the central bank is widely expected to hike its benchmark Overnight Rate by 25 basis points to 0.75% from 0.50%.

Wednesday offers just Wholesale Sales (0.3% m/m), while Thursday has plenty of key data due out including Core Retail Sales (0.5% m/m), Retail Sales (0.5% m/m), as well as the important BOC Monetary Policy Report and associated BOC Press Conference.

Friday ends the week with key Core CPI (0.1% m/m) and CPI (-0.2% m/m) data scheduled for release.

United States:

The economic data release calendar for the United States this week calms down considerably this week, but still offers some interesting policymaker speeches, as well as important data for forex traders on the U.S. housing market. In terms of economic data, the calendar features Tuesday's Building Permits and Thursday's Existing Home Sales releases.

The week commences on Monday with a speech by FOMC Member Duke scheduled in Virginia, as well as the release of the NAHB Housing Market Index (16).

Tuesday has the highlighted Building Permits (0.57M) data, as well as Housing Starts (0.58M) and testimony by FOMC Member Tarullo on Financial Regulation before the Senate Banking Committee scheduled in Washington, D.C.

Wednesday offers important testimony by Federal Reserve Chairman Ben Bernanke on the semi-annual monetary policy report before the Senate Banking Committee, in Washington, D.C.

Thursday is especially active with Initial Jobless Claims (453K), the highlighted Existing Home Sales (5.15M) data, the CB Leading Index (-0.3% m/m), the HPI (-0.3% m/m), plus more testimony by Fed Chairman Bernanke on the monetary policy report, this time before the House Financial Services Committee, in Washington, D.C.

Thursday ends the week since Friday has nothing notable due out.

Technical Outlook for USDCAD

On the technical front, USDCAD made a new recent low at 1.0275 early last week before bouncing sharply as high as 1.0556 to close the week slightly lower at 1.0545, up 2.0% overall. The rate continues to show signs of consolidating within a large symmetrical triangle pattern forming on the daily charts, with the latest upward move possibly constituting the fifth or e wave of the pattern.

This triangle apparently began with a move from the major low for the rate seen at 0.9929 on April 21st up to the 1.0853 high seen on May 25th. This gives a measured move length of 924 pips or 0.0924 from the chart pattern's eventual breakout point that should occur within the next week or so. The upper declining trend line is currently drawn at 1.0628, while the bottom rising line is drawn at 1.0230, so a sustained break of either line should see a substantial move in that direction.

Last week's up move has placed USDCAD's 14-day RSI into the upper part of central neutral territory at 56 and near what seem to be good short term selling levels, since that indicator also confirms the creation of a triangle pattern by showing successively lower highs and higher lows. Interestingly, this triangular consolidation period comes just as USDCAD is trading around the level of its 200-day Moving Average that now comes in at 1.0409, just under the current rate. This medium term indicator is also showing signs of flattening out its former downward slope, giving a neutral to bullish medium term outlook for the pair.

The Elliott Wave picture for this pair focuses on what appears to be the forming triangle pattern that may be in its final rising e wave. Nevertheless, this rally may also be the b wave of d in which case it should then be followed by a drop to the pattern's lower rising trend line before the breakout from this triangle is seen.

With the rate currently at 1.0545, the chart for USDCAD shows support at 1.0441, in the 1.0275/1.0357 region, and at 1.0179. Resistance shows up at 1.0556, 1.0604 and 1.0676.

From a short term perspective, this technical scenario suggests the strategy of selling rallies in USDCAD toward the level of the triangle's upper downward slanting trend line that is now drawn at 1.0628, and buying dips toward the lower rising line now at 1.0230.

The suggested longer term trading strategy would involve remaining neutral at present before trading this pattern's eventual breakout that should see a significant measured move ensue.

Figure 1: Daily candlestick chart of USDCAD showing its 200-day MA in red, Bollinger Bands in green, Trend Lines in purple and the 14-day RSI in the indicator box in pale blue.