- Breakout of range and large Elliot wave pattern recommends higher exchange rate over medium-term
- USD/CAD could potentially retest the 2016 highs
- The negative impact of rising global trade tensions support the technical call
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USD/CAD is breaking out of long-term falling channel with very bullish implications for the pair (and the US Dollar) over the medium-term.
The pair is also in the process of forming a large bullish Elliot wave pattern which suggests the potential for a retest of the 1.4689 January 2016 highs.
The past two months have witnessed a breakout from a long-term descending channel, which is a bullish sign for the pair and suggests a move higher of equal distance (b) as the widest part of the range (a).
The pair has just finished a 'throwback' move, which is a brief pause 'for breath' or pull-back to a technical level after a major breakout has occurred - but before the big follow-through surge begins. The weekly chart below shows this brief 'stutter' in the uptrend after the breakout more clearly than the monthly.
The uptrend looks like it is poised to take off now and surge higher to an eventual target at the 1.4689 highs.
The pair is also showing a compelling Elliot wave pattern which probably began in 2011 and looks like it is currently in the process of unfolding a final 5th wave higher - this too is forecast to probably retest the the end of wave 3 at 1.4689.
Research shows wave 5's almost always retest the highs of wave 3s.
The configuration of the MACD indicator in the bottom panel is further evidence supporting the expectation prices rise in a final wave higher.
After peaking, as is characteristic, during the formation of Wave 3 which is usually the strongest wave, the MACD has fallen back down to just below the zero line (circled), which analysts see as evidence of the completion of wave 4.
This indicates USD/CAD has now probably started a final wave 5 up. The MACD is now expected to form another, lower, peak thus eventually setting up a bearish divergence for the corrective decline after the whole 5-wave structure has finished.
The Elliot wave overall suggests a marked bias for a stronger USD and a weaker CAD.
From a fundamental perspective, this Wave analysisis in line with the view that the Canadian Dollar is vulnerable to an escalation in global trade tensions due to its reliance on commodity exports.
Elliot Wave analysis, is a form of cycle analysis which sees the market as moving in five wave cycles of buying and selling interspersed by three wave corrections.
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