USDCAD: a Continuation Play on the Loonie

FX:USDCAD   U.S. Dollar / Canadian Dollar
Last week the dollar finally traded in line with fundamentals again, with the Dollar Index gaining four out of five days. There had been a strong bearish sentiment surrounding the dollar for the last couple of weeks, helped by key data points coming out unfavourably and when a currency is fundamentally bullish, but sentiment-wise bearish, the result is choppy price action. Tuesday excellent US building permits and house starts data came out, showing the largest gains since many years. The FOMC minutes the next day were an anti climax with no relevant information being released and given the run of bad data in the weeks prior to its release; it could almost be viewed as out-dated.

Friday the core inflation numbers for the month and the year came out favourably. Since the FED monitors the core cpi (due to oil price volatility) this strengthened the Greenback further. Later that day, Yellen stated she expects the economy to strengthen and reconfirmed a rate hike is likely this year. This language, the overall bullish sentiment around the dollar of last week and the good inflation reading could lead to this bullishness continuing in the coming sessions. The Canadian economy on the other hand is failing to gain traction, oil prices have not made any gains this month and the latest retail and inflation numbers came out weaker than expected, weighing on their currency. All in all the Loonie gained 285 pips last week and I remain bullish on this pair.

On the technical side, we have a bullish rectangle on the 4H timeframe (80-pip wide) and price broke to its upside Friday afternoon on the back of the strong US core cpi figures. It also broke above a bearish trend line. This could be an entry pattern for the continuation of the bullish trend that started May 14th, when price reversed smack in the middle of a potential reversal zone (PRZ) consisting of the confluence of I) the lower trend line of a daily bullish parallel channel, II) the 382 retracement of the bullish leg that started July 2014 and III) a key structure support level. Regular bullish RSI divergence pointed to underlying strength and the price rallied until it formed the aforementioned bullish rectangle where a period of consolidation gave the oversold RSI some relief.

After price broke out of the rectangle it started a retracement. My assumption is it will eventually retest the break out level, which will serve as support. Going long there (with the SL below the break out level) is a conservative way to enter the bullish trend. The price movement is estimated by measuring the move of the leg prior to entering the consolidation and expanding it in the direction of the breakout. The projected move coincides with a key resistance zone at 1.255. TP1 = the 1.24 handle and TP2 = 1.255. In terms of trade management, when TP1 is hit I would take profit on half of my position and roll my stop loss to breakeven, enjoying a risk free trade towards TP2.

There are 300 pips to be made (if this pair follows the script) and the trade has a reward – risk ratio of 7.5!

You don´t need to be a weatherman to know which way the wind blows - B. Dylan

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