The Canadian dollar (CAD) strengthened against the U.S. dollar (USD), and reached a two-week high as market volatility eased.

With the turmoil fueled by the deleveraging of yen-funded trades and uncertainty around U.S. interest rate cuts now calming, market participants are regaining confidence in the CAD.

However, the Bank of Canada remains cautious about the nation’s economic future, citing concerns over future consumer spending.

The Canadian dollar’s recent gains have sparked hopes of a turnaround, but questions remain about whether the currency’s downturn is truly over.

What are the technicals saying?

Welcome to TA of the Day (TAOTD)! 👋

Let’s focus on the current technical setup of USD/CAD based on the daily chart:

USD/CAD 1D Chart by TradingView

📈 Technical Analysis of USD/CAD 1-Day Chart

Using technical analysis concepts covered in our forex course, let’s analyze USD/CAD.

Simple Moving Averages:

• 10-period SMA: Positioned around 1.3826. The price is currently below this level, indicating short-term bearish momentum. The slope is downward, suggesting recent short-term weakness.
• 50-period SMA: Positioned around 1.3717. The price is slightly above this level, indicating medium-term bullish momentum. The slope is upward, reinforcing medium-term strength.
• 100-period SMA: Positioned around 1.3687. The price is above this level, indicating medium to long-term bullish momentum. The slope is upward, suggesting sustained strength.
• 200-period SMA: Positioned around 1.3602. The price is well above this level, indicating long-term bullish strength. The slope is upward, confirming long-term bullishness.

Relative Positioning of Moving Averages:

• Order (top to bottom): 10 SMA > 50 SMA > 100 SMA > 200 SMA
• This alignment is bullish, suggesting an uptrend across all timeframes.
• However, the recent price drop of price below the 10 SMA suggests short-term weakness.

Stochastic Oscillator

• Stochastic Oscillator: The current reading is 18 (K) and 39 (D), indicating that the market is in the oversold territory. This suggests that the price might face support soon and could be due for a bounce.

🕵️ Key Observations

Price Action:

Let’s focus on the recent price action visible in the USDCAD chart:

1. Sharp Rally: The price action shows a strong bullish rally from late July to early August, with a series of green candles pushing the price from around 1.3200 to nearly 1.3900.
2. New High: This rally culminated in a new high for the visible timeframe, reaching just shy of 1.3900.
3. Rejection at Peak: Upon reaching this peak, there’s a visible rejection with a long upper wick on the candle, indicating sellers stepping in at these elevated levels.
4. Sharp Reversal: Immediately following the peak, we see a sharp reversal with a series of red (bearish) candles. This reversal is characterized by long-bodied candles, suggesting strong selling pressure.
5. Rapid Descent: The descent from the peak has been rapid, with the price dropping from around 1.3900 to current levels near 1.3740 in a short period.
6. Increased Volatility: The size of the recent candles, both bullish and bearish, indicates increased volatility in the pair.
7. Break Below Short-term MA: During this decline, the price has broken below the 10-day Simple Moving Average (SMA), which is often seen as a short-term bearish signal.
8. Approach to 50 SMA: The current price action shows the pair approaching and testing the 50-day SMA, which could act as a potential support level.
9. Potential Oversold Conditions: The rapid nature of the decline suggests the pair might be entering oversold conditions in the short term, which could lead to a bounce or consolidation.
10. Loss of Recent Gains: The current price action has erased a significant portion of the gains made during the late July to early August rally.

Support and Resistance Levels:

• Major resistance: Around 1.3900 (recent peak)
• Immediate resistance: Immediate resistance is around 1.3826 (10-period SMA).
• Immediate support: The 50 SMA at 1.3717.
• Potential support: The 100 SMA at 1.3687 and 200 SMA at 1.3602

Moving Averages:

• The 10-period SMA is currently acting as resistance, while the 50-period and 100-period SMAs provide critical support.

Stochastic Oscillator:

• The Stochastic Oscillator being in the oversold territory suggests a potential for a price bounce or consolidation.

Market Structure:

• Overall Trend: The market structure shows a long-term bullish trend, characterized by higher lows and higher highs since December 2023.
• Recent Swing Lows and Highs: The chart shows higher lows around 1.3600 in late June and higher highs around 1.3950 in late July, followed by a recent low around 1.3700.
• Break of Structure (BoS): A significant BoS occurred in late July when the price broke out above its previous swing high set in mid-April indicating a continuation of the uptrend
• Potential Change of Character (ChoCh: The sharp reversal from the recent high suggests a potential ChoCh if the price breaks down below 1.3750.

🤔 Potential Trade Scenarios

Is USD/CAD a buy or sell?

The following trade scenarios are provided solely for educational purposes. Since they don’t include full risk management practices, they are not intended to serve as actual trade recommendations, but merely food for thought to help you generate your own trade idea.

Long Bias:

• Entry Point: Consider entering a long position if the price finds support near 1.3717 (50-period SMA) or 1.3687 (100-period SMA) and shows signs of a bounce, such as a bullish candlestick pattern or a positive divergence in the Stochastic Oscillator. Additionally, a breakout above the resistance level at 1.38264 (10-period SMA) could indicate a potential recovery.
• Stop-Loss: Consider setting a stop-loss below the support level of around 1.3650 to manage risk.
• Target: Look for a move towards 1.3900 and higher if the uptrend resumes.
• Rationale: Targeting 1.3900 is based on the previous resistance level, which could act as a significant level for profit-taking. If the price manages to break above this level, it would indicate strong bullish momentum and the possibility of further upside.

Short Bias:

• Entry Point: Consider entering a short position if the price fails to hold the support level at 1.37179(50-period SMA) and 1.3687 (100-period SMA) and shows signs of bearish momentum, such as a strong bearish candlestick pattern or the Stochastic Oscillator remaining in oversold territory.
• Stop-Loss: Consider setting a stop-loss above the recent high at 1.3820 to manage risk. This level is crucial as a break above it would invalidate the bearish setup.
• Target: Initial target could be the support level around 1.3600. If bearish momentum continues, look for further downside towards 1.3500 or lower.
• Rationale: Targeting 1.3600 initially is due to it being a psychological and historical support level. If the price breaks below this level, it would signal further bearish momentum and the potential for a more significant downside toward the next support level at 1.3500.

📝 TAOTD Summary

• Trend: The long-term trend appears to be bullish with the price above the 200-period SMA, but the short-term trend shows significant bearish momentum with prices below the 10-period SMA.
• Key Levels: Support at 1.3717 (50-period SMA) and 1.3687 (100-period SMA) and resistance at 1.38264 (10-period SMA).
• Momentum: The Stochastic Oscillator indicates an oversold condition, suggesting potential for a short-term bounce or consolidation.
• Market Structure: Recent BoS indicates a continuation of the bullish trend,
• Moving Averages Analysis: The downward slope on the 10-period SMA indicates strong short-term bearish momentum, while the upward slopes on the 50-period, 100-period, and 200-period SMAs suggest critical medium to long-term support.

This recent price action suggests short-term weakness.  The market is currently at a critical juncture, testing an important moving average support level.

Watch closely to see if this support holds, potentially leading to a bounce, or if it breaks, which could signal further downside potential.

Remember, this analysis is based solely on the technical aspects shown in the chart. In real trading scenarios, it’s crucial to consider fundamental factors and broader market conditions.