A long swing trade setup was published for USD/CAD on August 16 following hawkish remarks from Fed member Dudley. The currency pair had traded at 1.2882 at the time, while the futures markets were pricing in a 55% probability of a US rate increase in December.
USD/CAD has since rallied, reaching a high of 1.3313 on October 7. The pair has been resilient and has gained during periods where oil prices have aggressively broken higher.
Since October 7, the pair has turned lower, declining over 200 points in a correction. The broader outlook for the pair remains unchanged, and with a notable decline within what is viewed as a bullish structure, the pair trades at attractive levels to add a second position to the existing long.
An Elliott Wave count published for the currency pair on September 16 indicates that the pair is currently within a bullish sequence from lows posted at the start of May. The first leg higher had completed on May 24 and has been labeled as wave (A), with the correction lower completing wave (B) on June 8. From the June 8 lows, the wave count indicates the pair is trading in wave (C) of the bullish sequence.
The updated wave count indicates that the recent highs has completed a the sequence from lows at 1.2822. In tracking the rally from August lows, marked wave B on the chart, the leg higher to wave (a) subdivided into a three wave sequence. The same is expected within the current rally as wave a of wave (c) has completed. It is quite likely the correction in wave b of wave (c) has already completed, but a further extension lower cannot be ruled out.
The current wave count remains valid while above wave B lows set in August. A rising channel is drawn connecting lows from May with lows from August and provides additional support in the bullish sequence. With the Bank of Canada scheduled to deliver their rate statement and press conference on Wednesday and a viewpoint that wave b of wave (c) is in place, it is not expected that the lower bound of the channel gets tested.
The Bank of Canada rate statement will be on Wednesday at 10:00 EST with the press conference at 11:15 EST. Every second meeting accompanies a press conference, suggesting this meeting could cause additional volatility to the currency pair. Since the last meeting, employment has been reported stronger while inflation was weaker than expected. There is an obvious parallel with the housing market in Canada and the rest of the commodity currency economies.
Australia and New Zealand warned about their overheated housing markets earlier this year but had also communicated intentions of lowering interest rates. Both countries proceeded to implement measures impacting lending standards in an effort to cool rising house price inflation. The same has been seen in Canada, as rising house price inflation has become a concern. While the BoC has not been vocal about reducing rates further, measures were announced at the start of the month, that when implemented, would serve to cool the housing market. If the bank is considering reducing their interest rate further, it would likely be revealed at the meeting on Wednesday.
US rate hike probabilities have moved higher since the original trade setup was posted. At the start of the week, probabilities for a move in December stood at 69.5%. While today’s odds have moved lower following the latest CPI release, markets are much more confident of a rate hike this year.
The US Dollar index (DXY) has moved sharply higher since September and was seen breaking to seven-month highs in the past week. Gains over the past two weeks have carried strong momentum behind it. Significant technical breaks have been seen in EUR/USD and USD/CHF as both pairs broke out of patterns that extended back to late 2015. The bullish breaks seen last week offer additional confirmation for the potential of a sustained bullish Dollar over the medium-term.
Technical support levels seen in USD/CAD include 1.3040 as the level triggered a bounce twice in September to keep the pair higher. The 1.3000 handle is seen as an important level. It had held the pair higher on several occasions in the early stages of a decline in August, and most recently triggered a sharp reversal on September 22. Further support derives from the lower bound of a rising trendline drawn from May lows to August lows. The trendline currently resides at 1.2945.
Targets for the trade setup remain at 1.3838 representing the 61.8% Fibonacci level measured from January highs to May lows.
In order to accommodate the second position without increasing risk exposure, the stop loss has been set to break even in the first position. The entry for the initial position was at market, and the exchange rate traded at 1.2882 at the time. The stop loss for the second position will be at the same level.
The entry for the second position will be at market. USD/CAD was last seen trading at 1.3119 for a loss of 0.05%.
Time Frame: 2-3 months