Chapter 20 05/03 USDCAD: Go Short at the Highs while Holding the Bullish Outlook but Not Buying at the Uptrend
Abstract: The USDCAD on Wednesday continued to consolidate near 1.3620. As fears of a U.S. recession intensified and oil prices plunged, CAD assets rebounded vertically after defending a key support of 1.3540.
Fundamentals
WTI crude oil has hit a monthly low of US$71.50, extending Tuesday's 5% drop.
Oil prices could fall further as an increasing number of central banks prepare to raise interest rates again to curb sticky inflation. It is worth noting that Canada is the major exporter of crude oil to the U.S. and the drop in oil price is affecting the CAD.
Meanwhile, the U.S. Dollar Index has fallen sharply to around 101.75 as investors expect the Fed to be relatively neutral about its future guidance. In addition, expectations of an increase in the U.S. debt ceiling are depressing the USD, as this would damage the long-term prospects of the U.S. economy.
In addition, despite China's reopening to boost demand and OPEC+’s sharp supply cuts, the trend of crude oil prices in 2023 still seems quite difficult. Fears of a possible recession in the U.S. economy and Russia's ability to maintain crude oil exports during the conflict in Ukraine have led to the withdrawal of investors.
Despite current demand and growth concerns, the Federal Reserve is expected to raise rates again later today, which will continue to put pressure on the demand outlook. With bears regaining dominance, oil prices are likely to remain low, thus pushing the CAD to the bottom.
Technical Analysis
After gaining buying interest near the demand area of 1.3525-1.3556, the USDCAD stagnated again in the range of 1.3648-1.3667.
The Relative Strength Index rebounded after gaining support near 40 and managed to climb above 60.00, which will activate the bullish momentum. If the asset crosses the April 28 high of 1.3668, bulls will push prices to test the level of resistance at 1.3700. Breaking that level would push the asset to a March 22 high of 1.3745.
On the other hand, a break below the May 2 low of 1.3529 would allow the asset to test directly for support at 1.3500, followed by a February 21 low of 1.3441.
Overall, although the sharp rise in CAD assets from the bottom level of 1.3301 is interpreted by the market as a return to range prices, the continuous pullback last Wednesday and Thursday has put more obstacles to the return of bulls; Although we conclude that there is still some prospect for bulls to rise, the space has narrowed significantly. It is recommended to go short at the highs while holding the bullish outlook but not buying at the uptrend.
Trading Recommendations
Trading direction: Short
Entry price: 1.3700
Target price: 1.3400
Stop loss: 1.3840
Deadline: 2022-05-17 23:55:00
Support: 1.3584, 1.3527, 1.3450
Resistance: 1.3666, 1.3690, 1.3750
