USD/CAD holds support heading into CPI, but 1.40 remains achievable

View related analysis:

• AUD/USD, NZD/USD: Commodity FX lead the way amid mild risk-on bounce
• CAD, AUD look set to benefit as the USD bull case becomes unhinged

It has been two weeks since we saw USD/CAD surge to a 22-year high, amid a flurry of tariff doom-and-gloom headlines. But that 22-year high was short-lived, with a clear momentum shift resulting in a -4.3% from said high. And I suspect there could be further downside for USD/CAD over the coming weeks.

And while we have another nine full trading days left in the month, it looks likely that USD/CAD will off February with a bearish engulfing candle around historical highs. Prominent tops formed in January 2016 and March 2020 having failed to conquer the 146 handle, and this month’s likely bearish engulfing candle shows a failed attempt to conquer 147. Furthermore, shorting the Canadian dollar on BOC rate cuts is not a new idea, and market positioning shows bears are shying away from a potentially exhausted short bet.

Canadian dollar futures (CAD/USD) positioning – COT report

The record level of net-short exposure to CAD futures peaked in August among large speculators. Since then, a bullish divergence has formed, and a bullish key reversal formed on CAD/USD futures following its false break of the 2020 low. Asset managers and large speculators have been trimming gross-short exposure since December, and more recently asset managers are slowly increasing longs. These are all the tell tail signs of a sentiment reversal in my books, and one that is being backed up by price action. I therefore expect to see CAD gain against the US dollar before this year’s low is retested.

USD/CAD technical analysis

While more core view is for USD/CAD to fall to 1.40, just above the October high, I doubt it will continue to do so in a straight line. Besides, we have already seen two weeks of selling, and last week’s range was smaller than the prior week to show a slight loss of bearish momentum.

Moreover, the daily chart shows prices are holding above a weekly VPOC (volume point of control) and 100-day EMA. The small bullish hammer and inside-day doji suggest a reluctance to push immediately lower, making USD/CAD susceptible to a bounce over the near term.

However, given the clues from higher timeframes and market positioning, bears could seek to fade into resistance levels such as the 38.2% Fibonacci level (1.4296) or the 2020 weekly-close high around the 1.43 handle.

Canada’s inflation report is up next

The Bank of Canada’s preferred inflation metrics are within the upper half of their 1-3% target band, but any moves closer to 2% increases the odds of further easing. And that could help support USD/CAD over the near term. But the BOC’s desire to cut is waning while we wait for the conclusion of delayed tariffs.

But as we have seen recently, tariffs have been the bigger driver for long commodity FX bets over monetary policy. So if they are removed or the delay turn into longer delays, it could see the US dollar weaken further against commodity FX pairs such as CAD, NZD and AUD.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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