'Wicked Reversal' in Canadian Dollar is Forecast

The Canadian dollar is tipped to continue outperforming the pound sterling while a 'wicked reversal' in the USD/CAD is being touted by one noted professional trader.  

The Canadian dollar rally has pushed the CAD 1.5 cents stronger against the US dollar over the past 24 hours.

This is the best rate we have seen to buy USD since December 9th. Against the British pound we are seeing levels last seen in May 2016.

The pound to Canadian dollar exchange rate's move lower has accelerated in recent days, reaching a low of to 1.9179, from the 2.000 handle, where it was only a few weeks ago – a roughly 5.0% decline in two weeks.

The decline has accelerated on Thursday with the GBP to CAD falling to 1.8945 amidst broad-based CAD strength; indeed the USD/CAD is lower by 0.84% at 1.3587.

"Cross flows at least partially explained the CAD’s resilience and the CAD continues to trade quite strongly on the crosses (GBPCAD remains close to multi-year lows while EURCAD retains a weak undertone," says Shaun Osborne at Scotiabank.

So with the GBP/CAD being so important to the North American currency's bigger picture, where can we expect the next moves in the pair to be?

From a chart perspective, the pair broke cleanly below the neckline of a large double top pattern, after Brexit fears started coming to a head during David Cameron’s negotiations in Brussels.

This confirmed a sharp move lower, which eventually materialised following the news Boris Johnson had joined the eurosceptic camp, with sterling falling dramatically lower to 1.9179, close to its minimum price target at 1.9025, which is 61.8% of the height of the pattern extrapolated down.

The exchange rate is currently consolidating after meeting major support from the S2 Monthly Pivot at 1.9177.

The meat of the move lower has now been completed, and the pair is now increasingly in danger of reversing and recovering.

Nevertheless, the 61.8% Fibonacci extension at 1.9025 remains in the cross-hairs, and bearing in mind that it only constitutes a minimum expectation, the pair could very well go even lower, perhaps reaching the 100% extension at 1.8600.

Latest Pound / Canadian Dollar Exchange Rates

	Live: 1.8615▲ + 0.07% 12 Month Best: 1.8915
*Your Bank's Retail Rate	1.7982 - 1.8056
**Independent Specialist	1.8354 - 1.8429 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Indicators such as the MACD which measures momentum, continue to support more downside too.

Confirmation of such an extension would possible come from a clear break below the S2 and the key 1.9000 handle, so ideally below the 1.8900 level.

Nevertheless, given the proximity of the minimum target, downside risks would be expected to start diminishing marginally at this point, as some of the smart money takes profits on the short-trade and exits.

Indeed, this may very well dovetail with the growing anti-CAD fundamental outlook, and the fact that a certain critical percentage of overall Brexit risk has now already been priced in.

Sell the USD/CAD Exchange Rate on 'Wicked' Reversal

With regards to the outlook for the US dollar to Canadian dollar Sean Lee, a professional foreign exchange trader, has said a break of major support in the 1.3625 area, coupled with improved bullish set ups in ES and WTI, sets the stage for a potentially major top in USDCAD.

The extent of the move lower could be somewhere in the range of +1,000 pips suggests Lee.

The trader observes market sentiment is overwhelmingly bearish and in spite of a huge move lower in Chinese equities overnight, US equities and Oil still trade very well which adds to my conviction here.

"Something feels a touch out of sync and I think we might be setting the table for a wicked reversal in coming days into what look like increasingly vulnerable and stubborn short positions," says Lee.

Tacitically speaking, Lee says he is for closing breaks of 1950 in ES and 33.35 in WTI to trigger a massive short squeeze, which should benefit Commodity FX and CAD in particular.

"I’m watching important supports at 1.3541 (.618 fib of the 1.2832/1.4689) and 1.3447 on the downside to further encourage my downside view while using the 200 DMA at 1.3244 as a 1st target to take profits," says Lee.

Additional tailwinds for USDCAD bears may have come from news that the PBoC is looking to recommend that the government raise the fiscal deficit to 4% of GDP (from the current ~2%) which works out to a potential US$180bln worth of additional stimulus if these measures are taken.

"This is of course supportive for commodity currencies and we note that price behavior was similarly bullish for AUD and NZD into the close," says Jeremy Stretch at CIBC, "still, that’s a longer-term story and for now our bias to continue accumulating USD on weakness with the 1.3500 mark as our line in the sand."