The Canadian dollar has weakened significantly relatively strong economic data over the past few weeks. The loonie selloff is mainly attributed to a precipitous decline with oil prices, concerns exports might not be as strong in the coming quarter, and a strong rush to buy U.S. dollars.
In Canada, Monday’s Building Permits improved for a third consecutive month, the August 29th reading on GDP came in better than expected at 0.3% , and both Wholesale Sales and Core Retail Sales beat forecasts predictions. The one big miss however came on August 22nd when Core CPI came in at -0.1%, much lower than the forecast of 0.1%. Earlier in the year, the Bank of Canada was concerned with the climb in inflation being attributed to rising energy prices, the recent slide in oil prices could keep core inflation (last reading 1.7%) comfortably below the 2.0% target set by the Bank. With inflation expected to remain soft, rate hike forecasts will likely be pushed back to later next year.
The loonie drop accelerated when price broke away from the 200-day, 100-day and 50-day Simple Moving Averages (SMA). The USD/CAD price barrier of 1.10 (90.50 US cents) did not put much of a fight as well and if we see price close above this level by the beginning of next week, further momentum may trigger further loonie weakness.
The USD/CAD daily chart shown above displays a potential bearish Gartley pattern at 1.1088, that may identify exhaustion in this recent bullishtrend. If valid we may see price reverse and ultimately look for a retest of the 200-day SMA, which currently trades at 1.0903. We would not be surprised if we eventually see the pair form a broadening formation pattern which may target to trade range bound between 1.0850 and 1.11 (89.75- 92.00 US cents).
The trade: Sell USDCAD at 1.1080 with a stop loss at 1.1150 and a take profit at 1.0870. The Risk/Reward Ratio is 1:3
Edward J. Moya
WorldWideMarkets Online Trading