USDCAD and what it might mean for Oil

[Mercury]

The twin factors that most impact USDCAD are USD itself (i.e. FOMC, NFP, key US economy data etc) and Oil, which is a major factor driving the Canadian economy. And it is easy to see an inverse relationship between USDCAD and Oil on price charts (check it out on the monthly or weekly charts). So looking at USDCAD can give extra insight into Oil moves, as well as being a secondary FX decent trading vehicle itself.

 

Fundamentals

I am bullish on USD long term, I believe a general downturn, not to say crash, will trigger a flight to safety and that means USD and Gold, possibly long term US bonds for a while unless or until the bond bubble bursts and then it is cash and gold while all else goes red. But we aren't there yet, stock indices have yet to reach a final tipping point.

 

Technicals

On USDCAD big picture (monthly chart below) we can see that if USD does go on another bull rally phase then this ought to happen on USDCAD as well unless something dramatic happens with Oil (i.e. a massive rally, unlikely I think...).  Therefore we can safely conclude that a rally is due on this pair BUT the key question is whether the wave 4 retrace (purple 4) is over yet. Currently USD (DX) is in a retrace down while EUR and GBP are rising and thee Yen is also strengthening.  This is likely to be a temporary situation I believe.  USDCAD on the other hand is rising and this is in opposition to USD direction so it must be Oil influenced and Oil is falling but is it nearing a rally?  Of note however is that USDCAD is back into the resistance zone where Wave A terminated.

 

Looking now at the Daily chart we can see the bear run down from the high at 20 Jan and this could have concluded in May 2016.  However there is another potential scenario building, which should be resolved soon one way or the other, and that is a Wave 3-4 retrace (Blue labels) to Fib 38% (in A-B-C form) before a final leg down to the Fib 50% drawn off the Wave 2-3 (purple labels) on the monthly chart.  Negative Momentum Divergence is building with RSI and Stochastic supporting a move lower.

 

Now looking at the Hourly chart we can see that A-B-C retrace and that the market is likely into the concluding leg up of the Wave C (which is always in a 1-5 form).  Interestingly the market produced a classic overshoot of short term support to bring up the wave 4 and rallied strongly back above support zone (providing a decent short term Long opportunity).  If we now see a small 1-5 rally up to the Fib 38% and associated Resistance zone and then see a confirmed turn then the likelihood of a large run down to that Fib 50% Wave 4 (Purple) is high.  After that the USD rally would get underway.

 

Note: this would all fit with a medium term retrace in USD and rally in Oil.  We likely have the former so watch out for the latter, which is a distinct possibility I think.

 



[donaldprice]

if DX continues on this trajectory, which currently technical suggest they are, this therefore would justify the increase pressure on oil, I do share your analysis, i remember a while back we discussed this scenario, and therefore looking for long opportunities now should be the opportunities, unless you fancy little shorts here and their (risky of course).

[Mercury]

Long opportunities on which market ?

[donaldprice]

USD/CAD, sorry forgot to mention that lol

[Mercury]

Yeah thought that was it  but just to clarify, while I am bullish USDCAD long term I think there will be a strong retrace first and possible to a lower low on the Daily/weekly chart.  This would coincide with a retrace on DX and a rally on Oil.  After that Long USD across the board and short Oil.

 

My point is that the near term resistance zone on USDCAD (13,300 ish) is a pivotal moment.  A strong break above negates my above view for a retrace first but a strong rebound back off that resistance confirms it.

 

Is that how you see it or are you long term bullish from here?

[donaldprice]

Yeah, for a short-retracement opportunity, I have been waiting for the 133-134 area for a retrace, which as you say could coincide with a rebound in oil which I too am waiting for.  

[Mercury]

Ok we are on the same page, just checking.

 

BTW, I have a contrarian alert this morning on Oil.  An investment weekly periodical just announced that "Oil is heading for a bear market - again".  This after calling Oil bottom before.  This has literally just dropped into my inbox in the past hour and check out Oil...  Ok it doesn't respond like that but it is telling for me.  The only reason given was that WTI was down 20% on the recent highs.  For technical traders that is a reason for a retrace, which is why the MSM is usually so behind the curve.

 

If confirmed this Oil move may well be a decent retrace rally or something more, let's see.

[Mercury]

A couple of watch outs on USDCAD, although price did indeed rally out of that possible support zone it has now returned, bounced away again and is currently again returning so the market can't seem to get away.  This brings up the possibility that the Wave C high I was looking for has already happened and a break back through that support zone brings the drop earlier than anticipated.  If we consider that USD is currently bearish then maybe that is driving this action.  If Oil then turns for a rally (whether substantive or merely a retrace of the current downward move) then USDCAD should drop.  And Oil is at another potential support zone.

 

This one is not yet clear but I would say a drop through the support zone is a Short signal, especially if we also see a drop on DX and a rally on Oil.

 

Any thoughts?

[Mercury]

The watch outs turned out to be relevant, Shorts below the support zone were a winner as Oil rallies (mildly just now but could be on for a contrarian rally of some strength)

[Mercury]

Quick update on this pair in light of Oil moves, the Wave 4 (Pink label) high seems to be confirmed, just short of my Resistance zone, and now does it look like a nice 1-2 retrace (blue)(4hourly chart) to set up a strong drop in wave 3 is about to kick off?  On the Hourly chart there were a couple of support zones broken and retested twice before dropping away.  This looks like a decent set up for shorting and if Oil does catch a bid then this pair could run far, maybe even 1000 points worth, before hitting significant support.

 

Please let me know if you see it differently!

 

 

[donaldprice]

Thought it would be an idea to look at this commodity/heavily influenced dollar pair and for a while was slightly puzzled as to what type of trend was $CAD trying to tell me and as you highlighted their, I have came to similar conclusions, although it appears that between early May and late July the market was forming a triangle and therefore since B = 5,3,5 waves B appears to be already complete.

 

 

[Mercury]

I tend to prefer the Weekly/Daily/Hourly to 4 Hourly, using the latter only to compact the hourly when the move is drawn out.  Looking only at the Daily on this one (because the whiplash is too challenging to work with the hourly just now) I have a Triangle formation in the retrace and am not sure if the Wave 4 has yet been achieved.  It is certainly a bit up and down, which is typical of a complex EWT 3-4 retrace.  There are 2 possible positions for the Triangle lower line, not sure which is right yet.  The key for me here is to wait for a break out of the Triangle either up or down, but I think down, and/or a rally higher to the Fib 38% Wave 4 completion.  This could happen on either a USD rally or an Oil retrace and final rally up.  I thing both are likely but perhaps the latter is more imminent.