Following a major move between May and July, CAD has staging a normal correction since late July. Having completed a common 23% retracement, upcoming trading action may determine if the recent reversal is over or the start of a bigger counter trend. With NAFTA renegotiations set to start this week, trade relations with the US could have a big impact on sentiment toward the loonie.
Between early May and late July, USDCAD staged a major move downward, dropping from near $1.3800 down toward $1.2400. By late July, the RSI had become extremely oversold and overdue for the trading bounce that has unfolded in recent weeks.
USDCAD has now completed a common 23% retracement of its previous downtrend and this upward correction appears to have run its course. Oversold conditions have eased and an outside bearish reversal day suggests that the bigger downtrend may be resuming.
Resistance has emerged near $1.2740, initial downside support may appear near $1.2655 then $1.2555 and $1.2500.
The big move in CAD was sparked by a shift in monetary policy at the Bank of Canada, who ended two years of stimulus with a 0.25% interest rate increase in July. A second rate increase this year back to 1.00% appears likely and has already been priced in to the Loonie.
This week, trade relations with the US are likely to steal the spotlight as the main driver of CAD and attitudes toward Canada away from crude oil and monetary policy. While Canada is an energy exporter, the US is its biggest trade partner by a long shot.
There have been a few dustups over trade between Canada and the US earlier this year in softwood lumber, dairy and aerospace. This week, we could see more rhetoric from both sides of the border as NAFTA renegotiations start on Wednesday. Comments from President Trump, Canadian External Affairs Minister Freeland, and other officials could influence trading through the week.
Note that the Mexican Peso (MXN) could also be active this week with US-Mexican trade relations (plus the planned border wall) also in spotlight.
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