Forex News: USD/CAD nearing end of falling wedge pattern

on Feb 18, 2014
Updated: Oct 21, 2019

**, Tuesday 18 February:**

In trading so far today, the USD/CAD has appreciated marginally but the bulls appear still to be on shaky ground. The combination of a lower high and lower low compared to yesterday signals that the pair’s path of least resistance in the near term may be to the downside.
On the other hand, the falling wedge pattern in formation since the end of January indicates that the bears may not be in control of the pair for much longer (see chart below).

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Regardless of the type (reversal or continuation), falling wedges are bullish patterns that typically result in a breakout to the upside before the respective boundaries of the wedge cross. Thus, the USD/CAD may find a bottom at 1.083, above the 61.8 percent Fibonacci retracement of the gains in 2014 and at 1.0801, the 38.2 percent Fib of the downtrend from 2009 to 2011.

A new reaction low below the previous one and within the falling wedge could prove to be an excellent buying opportunity before the uptrend resumes.
To this point, the missing ingredient in confirmation of a falling wedge breakout is any pick-up in volumes (green bars on the chart above). Without that expansion, the breakout will lack conviction and be vulnerable to failure.

Meanwhile, Morgan Stanley has entered a fresh long USD/CAD position to its medium-term macro portfolio. The trade has a notional size of $10 million and was executed at 1.0950, with a stop at 1.083 and a target of 1.14.
The US investment bank notes that Bank of Canada governor Stephen Poloz has recently sounded “increasingly uncomfortable about disinflationary pressures, with the BoC tilting more dovishly of late”. Further, that while policymakers are still disconcerted at Canada’s booming property market, the rhetoric on housing bubble concerns has softened and policy-makers “have suggested that they prefer macro-prudential measures to tighter monetary policy for addressing these imbalances”.

In the result, Morgan Stanley sees little chance of a rate hike by the BoC, which could threaten the USD/CAD bulls.
The bank sees the key risk to the trade being “if the US recovery adds more support to Canada’s exports than we expect.” Its analysts believe though that “deteriorating competitiveness and oil transport bottlenecks suggest that Canada is less poised to gain from US growth than historically”.


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