Canadian Dollar Analysis: Did USD/CAD Form a Bottom at 1.31?

Canadian Dollar Takeaways

• The US dollar has historically bounced back after the types of big selloffs that we saw last week.
• USD/CAD formed a big bullish reversal candle near trend line support on Friday.
• The bullish RSI divergence also hints that a near-term bottom may be in for a USD/CAD rally back toward 1.3300+, depending on Canada’s CPI reading.

Canadian Dollar Fundamental Analysis

The dominant feature of last week’s trade in the FX market was undoubtedly the big drop in the world’s reserve currency. Between the previous Friday’s disappointing NFP report and cooler-than-expected readings on both consumer and producer inflation indices, traders priced out any additional rate hikes from the Federal Reserve after this month, leading to big drop in the US dollar.

As we noted on twitter, the US dollar index has generally bounced back a day, week, and month after such dramatic selloffs over the past 50 years, though of course that’s no guarantee that the current selloff will necessarily follow the historical averages:

After past instances of a 5-day ROC < -3%:

🔷1-day forward return: +0.12%
🔷1-week forward return: +0.38%
🔷1-month forward return: +0.44%

BOTTOM LINE: On average, $DXY has bounced back after similar sharp drops over the past 50 years. pic.twitter.com/OncshlNsCb

— Matt Weller CFA, CMT (@MWellerFX) July 14, 2023

Early in this week’s trade, the greenback is recovering against all of her major rivals with the exception of the Canadian dollar, which is the strongest major currency so far today, despite a drop in the price of oil, Canada’s most import export. Looking ahead, traders may be positioning themselves for tomorrow’s Canadian CPI reading for June, which is expected to rise 0.3% m/m after a 0.4% rise last month.

Canadian Dollar Technical Analysis – USD/CAD Daily Chart

Source: TradingView, StoneX

Looking at the USD/CAD chart, rates formed a big “Bullish Engulfing” candle on Friday. For the uninitiated, A Bullish Engulfing candle is formed when the candle breaks below the low of the previous time period before buyers step in and push rates up to close above the high of the previous time period. It indicates that the buyers have wrested control of the market from the sellers and is often seen at significant bottoms in the market.

Meanwhile, USD/CAD also formed a clear bullish divergence with its 14-day RSI, signaling that even before Friday’s reversal candle, selling pressure in the pair was abating. If Friday’s big rally marks a near-term bottom for the pair, it could rally toward the 50-day EMA near 1.3300 or even the month-to-date high and 200-day EMA around 1.3400 as we move into late July.

After such a strong reversal pattern, bears would need to take rates below last week’s year-to-date low around 1.3100 to signal a resumption of the recent downtrend and move toward the psychologically-significant 1.3000 level.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX