Canadian Dollar, CAD, USD/CAD, CAD/JPY Talking Points:
The oil-CAD relationship has been on display over the past month as both markets have been bursting with strength. Oil price have jumped up to a fresh seven-year-high and the Canadian Dollar has been showing similar motive as the commodity currency has been well bid, helping to set fresh lows in USD/CAD and EUR/CAD as CAD/JPY has been ripping higher.
I looked into the matter last week, specifically focusing on the three CAD-based currency pairs of USD/CAD, CAD/JPY and EUR/CAD. Since then, the currency has only continued to strengthen even more, and this piece will serve as an update to that prior article with updated charts and analysis based on the past week of price action.
I looked into USD/CAD in yesterday’s webinar, highlighting a reticence from sellers that had allowed for a falling wedge to form. Falling wedges are often approached with the aim of a bullish reversal, largely from the deduction that sellers are more passive around tests of lows or at support than what they show at highs or tests of resistance. This can often lead to a pullback-type of move, so the bullish reversal may be short-lived, but for someone following a bearish trend, it can be helpful as it can allow for price to form that next lower-high.
In USD/CAD, it’s the price of 1.2300 that’s been fairly sticky for sellers over the past day, and this comes after last week’s low had built around 1.2335.
This may not be enough to forecast a full-fledged reversal in the pair, but it could certainly open the door for a pullback, and there’s three nearby areas of interest for such an approach. There’s a zone that runs from 1.2367 up to 1.2386, and this can function as an ‘r1’ area of resistance. Above that, around 1.2440, is a secondary level that can be looked to as an ‘r2,’ and after that, we have the 1.2478-1.2500 zone in full view as a potential ‘r3’ zone of resistance.
USD/CAD Four-Hour Price Chart
For themes around CAD-strength, CAD/JPY has been one of the more aggressive and given the backdrop, it makes sense as to why. Canada produces a lot of oil, so much so that the currency can often trade in a similar direction as oil prices. Japan, meanwhile, imports all of its oil and is backed by a monetary regime that’s been sitting on negative rates for going on six years. This makes for a potent fundamental cocktail that matches its recent technical exuberance, as prices have burst out of a falling wedge formation to push up to fresh five-year-highs.
There is another point of resistance along the way, however, as the current six-year-high sits a little higher on the chart, around 93.26. This may produce enough of a pause to bring a pullback, which can keep the door open for bullish continuation scenarios in the pair.
As for nearby support: The 92.00 area can be looked to as an ‘s1’ while the 91.17 level can be looked to as an ‘s2’ area of resistance. And if things really come unglued, ‘s3’ could be sought out around the 90.00 handle, and that seems to be a great test of the trend if/when it does happen given all of the confluent levels in that vicinity.
CAD/JPY Four-Hour Price Chart
— Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX