Key Points:
- Long-term trend line is now in danger of being broken.
- A head and shoulders pattern is becoming apparent.
- Rate hike expectations could assist the near-term recovery.
The Loonie took a rather spectacular, if unexpected, plunge last week which has taken the pair back below its 100 day EMA. This has cast some doubt on earlier expectations of continued upsides and might even suggest that the long-term ascending trend line is in danger of being broken. However, the bulls out there shouldn’t be too worried just yet as it looks as though we may have to wait some time for such a breakout to occur.
As shown below, whilst selling pressure has been notably intense – thereby raising concerns of a downside breakout – we still have some ways to go before the long-term trend is in danger of ending. Indeed, we may actually see a reversal quite shortly as a result of both the stochastics moving into oversold and the presence of a historical reversal zone. Regardless, even if we do see such a shift in momentum, we can’t quite rule out seeing a breakout within the next few weeks.
Specifically, a reversal within the next session or two would suggest that the Loonie is well on the way to forming a long-term head and shoulders structure. Of course, we would likely need to see the pair recover to around the 1.3515 handle before really committing to the forecast but a rally up to this level is not entirely unreasonable given the chances of us seeing a US rate hike in the near-term.
If we do end up seeing the above forecasted recovery, the subsequent decline could be rather substantial. Firstly, the USD/CAD could fall as low as the 1.3290 mark before even running into support courtesy of that long-term trend line as there is little in the way of support prior to this point. Nevertheless, this may only be half of the story as losses may even extend somewhere into the realm of the 1.30 handle. However, this would require breaking through the trend line which may require some bearish fundamentals.
Ultimately, the Loonie could be in for a bit of a bumpy ride in the coming weeks which could even result in the bears upending a yearlong trend. However, watch out for a near-term recovery before jumping into bed with those looking to send the Loonie lower as they may be hamstrung by rate hike speculation moving forward. Furthermore, pay particular attention to the technical readings as the pair moves to complete the final leg of the right shoulder as these could determine whether or not we see the final push back to the 1.30 handle or not.