Hi invest divas and divos! A quick USD CAD forex analysis suggests the US dollar has found a new support versus the Canadian dollar. After starting a massive fall against Ms. Loonie (CAD), Mr. USA (USD) jumped in mid-March on rumors that the fed might raise interest rates in its April meeting. With the Non-Farm Payrolls and oil data coming up, what can we expect from this hot currency pair? Let's find out, with help of the Invest Diva Diamond Analysis
1-USD CAD Forex Analysis - Fundamentals
When conducting a USD CAD forex analysis, there are three important factors you need to focus on: US economy, Canada's economy and oil. While Canadian dollar is directly correlated with oil prices, US dollar mostly moves in the opposite direction. That's why oil prices play a great role in the pair's moves on the forex dance floor.
What's up with oil?
Oil still remains in an overall global oversupply position for 2016 and into early 2017.
There are a few positive developments which starting pushing oil prices higher mid February:
- Since mid-January 2015, US onshore production growth has declined;
- OPEC and Russia are meeting at the end of the month to discuss a cap-ceiling on current production NOT a reduction.
- Oil price speculators have sensed a bottom in oil prices at roughly ~$30/bbl. These speculators have begun to reduce their short (selling) positions in oil futures, and increase their long (buying) positions in oil prices. That's because they focus on the pull back in US onshore production and are eyeing the possible "production freeze" agreement between OPEC and Russia and . This reduces the downward pressure on oil prices.
With global demand continuing to grow, supply shortfalls may be inevitable post 2020. That could generate higher oil prices, roughly $80-$85/bbl as the price cycle moves upward.
What's up with US economy?
Let's back up a little bit to the beginning of 2016. If you are on my mailing list, you should know that Fed members turned into doves beginning of January 2016. That means, after raising interest rates in December 2015 -which was quite a hawkish move-, they became less aggressive. They even said we might not see another interest rate hike in a while.
If you were paying attention during your beginner Invest Diva lessons, you would know that an interest rate hike, or even mere speculation of a rate hike, normally strengthens a currency against its forex dancing partners. The currency weakens if the opposite happens.
Now let's fast forward to end of March. A bunch of Fed officials turned back into hawks last week. The only voting member of the crowd was James Bullard. But the comments were still strong enough to push Mr. USA higher up again major forex counterparts.
Important to remember is that all of these hawkish statements came out before the final estimate for Q4 2015 U.S. GDP. While the final estimate was revised higher, corporate profits dropped hard, which has negative implications for the U.S. economy.
With that said, Fed head Janet Yellen will give a speech on Tuesday (March 29) while New York Fed President William Dudley is scheduled to speak this Thursday (March 31). We also, another all-important Non-farm payrolls (NFP ) event on Friday, just in time for April Fools day. We probably should rule out the possibility of a Fed joke though. Book your lesson with me today to keep an eye on all these market moving events and get a better sense about US dollar future price actions.
What's up with Canada's economy?
Other than a super hot new prime minister, Canada has scored in a number of other areas as well recently.
- Business conditions and sentiment remained upbeat for the Q1 2016
- Canada's economy and GDP has been expanding in 2016
- Consumer spending started the year strong
- Building permits for industrial construction also jumped in January, which is a good sign that Canada's economy is beginning to move away from being too dependent on oil exports
- Canada's GDP growth got hit back in Q4 2015
- Manufacturing sector is still contracting a bit
- Deteriorating labor conditions could affect consumer spending later
Digging deeper below the surface, Canada's economy is still in bad shape. Especially Canada's labor market. But there are promising signs that investors are looking to invest in other industries. In the meantime, the oil rally could probably help to soothe Canada's pain.
2- USD CAD Forex Analysis - Long term Technicals
Going all the way back to 2003, we notice a Double Bottom pattern formation on the monthly forex dance floor. The pair broke above the neckline in July 2015, which coincided with 38% Fibonacci at 1.27. With the pair above the ichimoku cloud, we continued a ride towards our targets at 1.40 and 1.45 till the end of 2015.
With this, we could say that the long-term Ichimoku indication is exhausted. While there is a chance of a correction to the upside, the uptrend might have been reversed for the next few years.
3-USD CAD Forex Analysis - Sentiment
On the daily chart the USD/CAD pair has already broken below the ichimoku cloud. The RSI is heading down below neutrality area. The pair is under pressure below the short term 50% Fibonacci at 1.3260.
It briefly tested the 61% Fibonacci and the lower band of Bollinger Bands. The support remains at 1.2950. However the pair formed an Evening Star Candlestick pattern right at the middle of Bollinger Bands.
USD CAD Forex Analysis- Trading Strategy
Now that we've crushed the fundamentals, market sentiment and technical points, let's see what the Invest Diva Diamond
A break below 1.2950 could open doors for more drops: We have a number of bearish signals accumulating on the long-term and short term technical charts. The key to the fundamental analysis is oil. It is strengthening Canadian dollar despite the so-so Canadian economy. If Ms. Yellen and her gang at the Fed fail to signal something incredibly bullish for the US dollar, we could expect this pair to continue down.
A Break above Ichimoku is needed for bullish scenario: While we could see corrections to either of Fibonacci retracement levels on the daily chart, in order to get back to our long term bullish scenario targeting a.50, we first need the pair to break through the thick Ichimoku cloud. That could only happen if oil goes under pressure again, and at the same time Fed turns super bullish. So yeah, the chances are pretty slim.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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