Canadian Dollar Price Outlook: How Far Will the USD/CAD Recovery Go？

USDCAD Talking Points:

• USD/CAD put in an aggressively bearish move in June and July, eventually finding support just above the 1.3000 handle.

• Since then, a bullish reversal has taken-hold and prices have retraced 50% of that prior sell-off.

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USD/CAD Retracement Continues

It was a month ago now that USD/CAD had bottomed-out. While the pair had spent much of the prior 17 months trending-higher, sticking to a bullish trendline for much of the time, the month of June brought a strong change of pace as the US Dollar fell while the Canadian Dollar strengthened. Out of the US, the USD was being driven lower by the prospect of rate cuts from the FOMC, and in Canada, a strong inflation print highlighted the fact that the BoC likely wouldnt be able to adopt a similar stance. In short-order, USD/CAD fell from a late-May high above 1.3500 all the way down to the 1.3000 handle in mid-July. At that point, sellers began to shy away from a test of the big figure and later in the month, a falling wedge formation had formed, pointing to the potential for a bullish reversal. That theme has played out and almost a month later, continues to hold.

USD/CAD Weekly Price Chart

Chart prepared by James Stanley; USDCAD on Tradingview

Canadian inflation moderated in June, dropping back down to 2% after printing at 2.4% for the month of May. That 2.4% print is what helped to drive strength in the currency during that run in June, and the fact that this pulled back a bit is whats helped CAD weakness to return over the past month. The next Canadian inflation print is due in a week, released next Wednesday morning at 8:30 AM ET. This will likely be the next major push point in the pair.

At this point, USD/CAD is finding resistance around the 50% retracement of that June-July sell-off, and this is around a series of support swings that showed-up in April and May of this year.

USD/CAD Daily Price Chart

Chart prepared by James Stanley; USDCAD on Tradingview

USD/CAD Strategy

Given the month-long theme of strength in the pair following the aggressive sell-off that showed previously, and there could be scope for further recovery until the short-side of the pair comes back into favor. And taking a step back on the chart, there is a nearby zone of interest for longer-term resistance potential. This rests from the confluent area on the chart that runs from 1.3361-1.3385.

USD/CAD Eight-Hour Price Chart

Chart prepared by James Stanley; USDCAD on Tradingview

USDCAD: Timing Bearish Reversals

Similar to the backdrop in mid-July, traders are likely going to want to look for some evidence of topping before plotting for bearish reversal scenarios. In mid-July, sellers began to slow the approach as prices pushed towards the 1.3000 big figure. After a continued failure to test the psychological level, a falling wedge formation eventually formed, which allowed for a backdrop conducive for bullish reversals, as looked at last month. My final target on the pair was the 1.3250-1.3000 zone, at which point I wanted to start looking to take the pair back-down. That zone hasnt yet presented enough evidence that the short-side of USD/CAD may be attractive, and this is what brings into play the potential for that higher zone around 1.3361-1.3385 to become usable again.

But, at this point, the near-term bullish trend is strong and well-extended, thereby producing a difficult scenario for managing risk on topside strategies.

USD/CAD Four-Hour Price Chart