USD/CAD Path More Risky as Key Resistance Looms
USD/CAD OUTLOOK: NEUTRAL
- USD/CAD has risen aggressively in recent weeks, rising from 1.2400 in early April to the edge of 1.2900 this week
- Negative Sentiment, Hawkish Repricing of Fed Rate Hike Expectations and Broad-Based US Dollar the strength of the foreign exchange market weighed on the canadian dollar
- While the USD/CAD seems biased upwardsbut the recent advance may struggle to continue as key resistance near 1.2900/1.2915 could block the upward trajectory
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At the beginning of April, USD/CAD flirted with the 1.2400 level, but it exploded higher, rising towards the 1.2900 zone amid risk aversion, a hawkish reassessment of expectations for Fed rate hikes and general strength of the US dollar in the foreign exchange market. .
With Wall Street and global stocks boiling, sentiment deteriorated, prompting traders to shed high-beta currencies and increase their exposure to king USD, a quintessential safe-haven asset. It is therefore not surprising that the Canadian dollar, colloquially known as the “Loonie”, has weakened sharply against the greenback in recent weeks, despite strong domestic fundamentals and the aggressive tightening cycle of the Bank of Canada.
By focusing on technical analysis, we can see that the latest USD/CAD rally stalled near a key high extending from 1.2900 to 1.2915. Sellers have presented themselves when prices have hit this zone numerous times since last year, halting advances and driving the exchange rate down almost every time, as seen in the daily chart below, so a a bearish reversal from current levels should not be ruled outas it could be on the horizon for the next few days.
If the USD/CAD turns lower and begins a rapid descent, support is at the 1.2800 psychological handle. On a retest, we would need to see the market reaction to better gauge the short-term outlook, but if the bears manage to remove this floor from the picture, the pair could be poised to challenge the most. May low near 1.2715. On further weakness, focus shifts to 1.2675, followed by 1.2640, the 200-day simple moving average.
On the other hand, if USD/CAD breaks out higher, breaking above the 1.2900-1.2915 hurdle decisively in daily closing prices, buying interest could accelerate. and set the stage for a rally to the 2021 high around 1.2965. From a chartist’s perspective, this resistance needs to hold otherwise there could be a strong near-term upside as there are no technical barriers up to 1.3090/1.3100 (see daily chart for more details).
USD/CAD TECHNICAL CHART
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—Written by Diego Colman, Market Strategist