Weekly Recap and Outlook for USDCAD - 7/26/2010

Written by ForexTraders.com on July 26, 2010 at 4:42 PM ET

USDCAD declined significantly last week, giving back all of the previous week's gains. The Loonie started picking up steam on Monday as Canadian Foreign Securities Purchases showed an increase of almost 11B coming out at 23.16B, which was almost triple the amount expected of 8.05B and almost double the previous number of 12.36B. The number indicates the considerable interest that foreigners continue to have in investing in Canadian securities.

On Tuesday, the rate continued heading south as the BOC released its Rate Decision for July along with an associated Rate Statement where it announced that the central bank was raising its benchmark Overnight Rate to 0.75%, as was widely anticipated. In addition to the Overnight Rate, the bank also raised the Discount Rate by 25bps to 0.50% and the Bank Rate by 25bps to 1%. In their statement released along with the rate hike announcement, the BOC noted that there was "considerable uncertainty surrounding the outlook" and that limiting the level of monetary stimulus "would have to be weighed carefully against domestic and global economic developments."

USDCAD began rising on Wednesday after Canadian Wholesale Sales declined by -0.1%, considerably worse than the expected rise of 0.4%. The rally was cut short however, as the decline resumed on Thursday on Fed Chair Bernanke's comments about the U.S. economic outlook being "unusually uncertain". The Loonie strengthened despite the BOC Monetary Policy Report revising the central bank's Canadian GDP growth estimates downward to 3.5% from 3.7% in 2010 and to 2.9% from 3.1% in 2011.

Also on Thursday, Canadian Core Retail Sales declined by -0.1% month on month versus a rise of 0.5% expected, and Canadian Retail Sales declined by -0.2% month on month versus an expected increase of +0.5%. USDCAD then went on to make its weekly low of 1.0345 on Friday as Canadian Core CPI dropped by -0.1% month on month, versus an expected increase of 0.1%, while CPI declined by 0.1% versus an expected flat reading. USDCAD then went on to close the week at 1.0358, down 1.8%.

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 are much sparser than last week, but do feature the important Canadian GDP number due out on Friday.

Monday, Tuesday and Wednesday have nothing notable due out, so Thursday starts the week out with the release of the Raw Materials Price Index or RMPI (1.1% m/m) and the Industrial Product Price Index or IPPI (0.6% m/m).

Friday then offers just the highlighted Canadian GDP release (0.1%) to end the week.

United States:

The economic data release calendar for the United States this week is moderately active like the previous week, and offers some interesting data for forex traders on the U.S. economy. The U.S. economic calendar features Friday's key Advance GDP data.

The week commences on Monday with just New Home Sales (317K) due out. That is followed on Tuesday with the S&P/CS Composite-20 HPI (3.8% y/y), as well as the important CB Consumer Confidence index (51.5) and the Richmond Manufacturing Index (20).

Wednesday offers Core Durable Goods Orders (0.6% m/m), plus Durable Goods Orders (0.9% m/m) and the closely watched Fed Beige Book.

Thursday only has Initial Jobless Claims (456K) out in terms of notable releases, and Friday closes the week with plenty of action.

Releases on Friday include the highlighted Advance GDP number (2.5% q/q), plus the related Advance GDP Price Index (1.1% q/q) and the Employment Cost Index (0.5% q/q). Also out on Friday are the Chicago PMI (56.1), the Revised University of Michigan Consumer Sentiment survey (67.5) and University of Michigan Inflation Expectations (last 2.9%).

Technical Outlook for USDCAD

On the technical front, USDCAD traded lower overall last week, making first a lower high at 1.0584 before making a higher low at 1.0345. The pair closed the week down 1.8% overall at 1.0358, having reversed most of the previous week's gains. The rate continues to show clear signs of consolidating within a large symmetrical triangle pattern forming on the daily charts, with the latest downward move possibly constituting the third wave of the fourth or d wave of the pattern. The move may extend as far down as the rising lower trend line that is now drawn at 1.0252 before correcting higher as the upward e wave commences.

This triangle seems to have begun 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 1.0600, and with the bottom rising line drawn at 1.0252, a sustained and confirmed break of either line should see a substantial move in that direction.

Furthermore, last week's down move has placed USDCAD's 14-day RSI in the lower part of central neutral territory at 42, right around the level of the rising trend line drawn on that indicator. The key indicator also seems to be showing very slight hidden divergence on the latest low seen in the rate at 1.0345 versus the low seen at 1.0275. This is a bullish sign for the rate, which would be consistent with the idea of an upward e wave to come.

Interestingly, this triangular consolidation period comes just as USDCAD is trading right around the level of its 200-day Moving Average that now comes in at 1.0411, just above the current rate. This medium term indicator has also pretty much flattened out its former downward slope, giving a rather neutral overall 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 soon be ready to finish its fourth declining d wave with a low below 1.0275. USDCAD should then reverse to make its final rising e wave. Nevertheless, this current decline should be watched closely just in case a confirmed break of the pattern's lower trend line now drawn at 1.0252 signals the end of the consolidation pattern.

With the rate having closed at 1.0358 last Friday, the chart for USDCAD shows resistance at 1.0428, in the 1.0579/84 region and at 1.0604. Support for the rate shows up at 1.0345, in the 1.0275/1.0357 region and at 1.0179.

From a short term perspective, this technical scenario suggests the strategy of looking to buy dips in USDCAD toward the level of the triangle's lower upward slanting trend line that is now drawn at 1.0252, although watching for signs of a breakout to the downside. Profits would then be taken near the triangle's declining upper trend line now at 1.0600.

The suggested longer term trading strategy would involve remaining neutral during the present consolidation period before trading the potential triangle pattern's eventual breakout that should see a significant measured move on the order of 924 pips follow in the same direction.

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.