Canada Ready With Loaded Double Barrels: USD/CAD Could Test Prior Highs
Joe Perry | Mar 17, 2020 15:29
The Bank of Canada made a surprise rate cut of 50 bps on Friday to bring the interest rate to 0.75%. Today, the BoC announced it is ready to adjust policy further and use all available market tools to support growth and keep inflation on target. In addition, Prime Minister Justin Trudeau said that he is planning to bring back the House of Commons to pass emergency measures, in order to get money to citizens. With the continued demand for the U.S. dollar, low oil prices , and the continued easing from Canada (with room still to go), the USD/CAD is up over 825 pips since March 6th.
What an amazing move USD/CAD has had since March 6! On a weekly timeframe, after a false breakdown below the symmetrical triangle, price traded the opposite way and gapped higher on March 9. Price is now significantly higher on the breakout to the topside. Resistance is at the highs from January 2016 near 1.4682. The RSI is in overbought territory and is diverging, however, given the parabolic nature of the move, it should not be used as the sole decision maker for a reversal.
With the amount of room that the BoC still has to cut rates and continued selloff in oil, USD/CAD may continue to move higher. This is a great example of “the RSI is overbought, but in volatile one-way markets such as this, the oscillators don’t matter.” Notice how if someone has solely used the RSI as a decision maker on March 13, and took a short USD/CAD position when it turned lower from above 80, that person would still be out of the money from that position (without a proper stop).
On a 240-minute chart, we have a better look at the magnitude of the recent more in USD/CAD:
- Jan. 22, the BoC turned dovish in their press conference and the USD/CAD moved from 1.3044 to 1.3152, roughly a 108-pip move.
- March 4, the BoC was dovish as well, while cutting interest rates from 1.75% to 1.25%. The market moved from 1.3327 to 1.3407, roughly an 80 pip move.
- On March 6 the pair closed at 1.3420. On March 9, the pair gapped higher to 1.3550 as Saudi Arabi announced that they will increase output to counter Russia’s oil output. Price continued to today’s highs near 1.4245, roughly 825 pips higher.
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As I mentioned earlier, resistance isn’t until 1.4682 on the weekly. There is shorter term support at 1.4017 and 1.4000. Below that, support is the 38.2% retracement from the March 9 low to today’s highs, near 1.3970. Also, the 50% retracement level confluences with the rising trendline near 1.3884.
Although USD/CAD can pull back, with all the ammo the Bank of Canada still has left, it wouldn’t be unusual for the pair to run up and test the prior highs near 1.4682.
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