USDCAD, Yields, Inflation, Fed and Technical Analysis Points:

• The Market Perspective: USDCAD Range Between 1.3475 and 1.3275
• USDCAD has established a robust range between 1.3475 and 1.3275 over the past four weeks, similar to the congestion patterns of other Dollar-based majors
• Where pairs like EURUSD and USDJPY are more prone to added volatility that can generate ‘false breaks’ in markets not tuned to follow through, USDCAD may find more anchoring

Most newer traders like to go to where the volatility is expected to be. That is a natural urge as there is an inherent – and too often misplaced – confidence in one’s own ability to choose an optimal point of entry for trades. If you believed that you could pick the best timing and place for getting into a market, the variable you would pursue would be an asset offering the greatest potential for volatility and a picture that is prone for a big price swing. That is why there is so much effort to pick tops and bottoms among retail traders. However, genuine peaks and troughs are rare events and follow through requires market conditions that back such a course. Current conditions suggest the markets at large, and including the Dollar pairs, are congestion prone. As such, I am looking for pairs/assets that are likely to be more observant of their range. USDCAD is near the top my list for these qualifications.

From a technical perspective, it would be difficult to miss the boundaries. The most immediate but significant resistance and support for USDCAD for me would be the 1.3475 to the upside and 1.3275 as a floor. The former is formed through four tests and rejections over the past four weeks with the 50-day SMA playing backup. The lower bound is developed through the combination of a double bottom in February and trendline support on the larger wedge back to mid-September. Even if we were to push past these levels, the density of subsequent technical pressure would create a strong headwind for all but the most ambitious moves. Above 1.3475, we have the 38.2 percent Fibonacci retracement of the October peak to November congestion pattern low at 1.3515 and the trajectory of the resistance to the larger wedge is at 1.3570. Below 1.3275, the there is a confluence of the midpoint of the June 2022 to October 2022 leg higher, 38.2 percent Fib of the June 2021 to October 2022 run and 200-day SMA all between 1.3250 and 1.3220.

Chart of USDCAD with 50 and 200-Day SMAs (Daily)

Chart Created on Tradingview Platform

If there is no dominant force pressuring markets into a bullish or bearish re-adjustment of value, markets tend to hold congestion conditions. That doesn’t mean that we can’t push beyond a technical barrier, but follow through will be more difficult to achieve. USDCAD is appealing on this principal because there are so many indicators in the general region higher and lower that it would be difficult to miss the boundaries and thereby encourage more of the market to abide. That translates into a lower probability of ‘false breaks’. The fundamental backdrop also supports this moderation. The US and Canada are closely tied economies, with economic health and financial flows fairly stable between the two relative to external exchange rates. When it comes to deeper fundamental themes, interest rate expectations have been held fairly stable as seen in the spread between the two-year government bond yields between the two (purple below). Given the contained differentials, we have seen the 20-day correlation (green below) to show limited influence over the various legs of movement for the exchange rate. As for the larger, looming force of risk trends; this pair is far less sensitive to swings in confidence than say USDJPY or even EURUSD. That said, it seems to have a stronger statistical influence all things being equal, as can be seen in the 20-day correlation to the VIX (red) below. If there is a sudden flare up in volatility (‘fear’), it could present a strong upside pressure.

Chart of USDCAD Overlaid with US-Canada 2-Year Yield Spread with 20-Day Yield/VIX Correl (Daily)

Chart Created on Tradingview Platform

Projecting a sudden change in sentiment winds is not a productive venture. There is nothing in the backdrop of the market that presents itself as a lurking spark and we haven’t really witnessed a system prone to the extremes of ‘greed’ and ‘fear’. As far as the scheduled event risk through the end of the week goes, there are a few scheduled events worthy of our attention. On the US side, I will be watching the Fed speak (Brakin is scheduled, but others are likely to make unscheduled remarks) as well as the Conference Board’s Leading Index for January. The latter has gained some prominence lately as being a possible recession signal. For the Canadian docket, the upstream inflation readings (PPI and raw material indices) are can tap into BOC rate expectations, but this is not a particularly pressured outlet.

DailyFX Calendar of Major US and Canadian-Based Economic Event Risk

Calendar Created on DailyFX