The downward trend will likely continue as sellers target the next key support at 1.2700.

Bearish View

• Sell the USD/CAD pair and set a take-profit at 1.2700.
• Add a stop-loss at 1.2850.
• Timeline: 1-2 days.

Bullish View

• Set a buy-stop at 1.2850 and a take-profit at 1.2950.
• Add a stop-loss at 1.2750.

The USD/CAD price came under pressure on Monday morning as the US dollar weakness continued. The pair slipped to a low of 1.2800, which was the lowest level since June 13 of this year. It has fallen by about 3.15% below the highest point this year.

Canadian Dollar Comeback

The USD/CAD price had a mixed performance in July. The pair initially rose to a multi-year high of 1.3228 as the US dollar strength continued. It then made a major pullback as investors embraced a relatively risk-on sentiment.

In July, data from Canada revealed that the economy was going through some challenges. Inflation surged to the highest level in more than three decades because of the soaring oil and gas prices. At the same time, the labor market weakened in June as the economy lost over 30k jobs.

On a positive note, the unemployment rate dropped to about 4.7%. This was the first time it moved below the important 5% since the pandemic started. Further data revealed that the economic recovery is moderating.

According to Statistics Canada, output in June rose by just 0.1% after it stalled in May. As a result, the economy expanded by about 4.6% on a year-on-year basis. As such, analysts expect that Canada’s economy will start to moderate after it recorded substantial growth in the first half of the year. Analysts believe that the economy expanded by 2% in Q2.

There will be no economic data from Canada on Monday. As such, investors will focus on the latest manufacturing numbers from the United States. Economists expect data by S&P to show that the PMI slowed to 52.3 in July. The other reading by the Institute of Supply Management (ISM) is expected to have dropped from 53 to 52.0.

USD/CAD Forecast

The four-hour chart shows that the USD/CAD pair has been in a strong bearish trend in the past few days. As a result, the pair has formed a descending channel that is shown in purple. It has also moved below the 25-day and 50-day moving averages while the MACD remains below the neutral point.

The USD/CAD price has moved slightly below the 50% Fibonacci Retracement level. Therefore, the downward trend will likely continue as sellers target the next key support at 1.2700. A move above the resistance level at 1.2850 will invalidate the bearish view.

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The Canadian dollar is softening against a lot of currencies, so this is a huge surprise.

The US dollar initially pulled back a bit on Friday but then turned around to show signs of life again near the 1.28 level. This is an area that has been supported multiple times, and it is likely that we will continue to see buyers trying to take advantage of “cheap dollars.” Keep in mind that the US dollar continues to see a lot of inflows, and I think we will continue to see that being the case. After all, interest rates in America continue to climb and the Canadian economy is starting to suffer.

The oil market has been rather strong, but quite frankly the US dollar and crude oil can rise at the same time. After all, the US dollar has a lot of pressure on it due to the demand for yield, but at the same time there is a lot of inflationary pressure out there, thereby driving crude oil higher. Furthermore, I think it is only a matter of time before we start to price in even further supply disruption because even though demand might be dropping a bit, the reality is that we are at historic lows for supply in certain grades.

The 50-day EMA is currently at the 1.2754 level, as it is starting to rally and offering a certain amount of dynamic support. Ultimately, I think that every time we pull back we will find buyers, and it looks like we are going to make another attempt at the 1.30 handle. The Canadian dollar is softening against a lot of currencies, so this is a huge surprise. Money continues to flow into the United States, and I think that will be the theme for the next several weeks at the very least.

As the Federal Reserve continues to tighten and sound hawkish, a lot of money is going to be running to the safety of US bonds. Canadian bonds are not necessarily Third World, but they do not hold the same type of “same as cash” appeal that US Treasuries do. If we can break above the 1.29 handle, then it is likely that we will go looking to the 1.30 level. If we break above the 1.30 handle, then it is likely that we will go much higher, perhaps breaking to a fresh, new high.

A lot of traders will struggle with this trade because they are so used to trading solely based on crude oil.

The US dollar has initially pulled back against the Canadian dollar but then turned around to show signs of life again. The market has been in a consolidation area for a while, and therefore it is not a huge surprise to see that buyers had come back into the middle of the region. After all, the 1.25 level has been very important for a while, and therefore one could have expected a bit of buying pressure.

The 50 Day EMA and the 200 Day EMA are both sitting just above recent trading action and are both flat. This suggests that the market is still going to remain range-bound, which makes quite a bit of sense considering that the Bank of Canada has just done a 50 basis point interest rate hike, and the Federal Reserve is expected to do the same shortly. In other words, we are essentially in some type of balance.

When you look at the chart, you can see that clearly the 1.25 level has been supported, while the 1.29 level has been resistant. In general, I think we will stay in this range, but it is worth noting that there is a major hammer that formed when we pierced the 1.25 handle. If we can break it down below that level, which is essentially the 1.24 level, then it is likely that the market will start to fall apart at that point. In that scenario, it would probably have something to do with a major spike in the crude oil market, but it is difficult to imagine a situation where we get that big of a move.

For what it is worth, the US dollar was rising while the oil markets did the same during the day, so the correlation does not have to all the time, and in the situation that we are currently in, being stagflation globally, it is very likely that this should continue to be a loose connection at best. Because of this, I think a lot of traders will struggle with this trade because they are so used to trading solely based on crude oil. The size of the candlestick during the trading session on Thursday was rather impressive, so it will be interesting to see if we can break above the 1.27 level, which would more likely than not open up the possibility of a move to the 1.29 level.