USDCAD finally comes out of hibernation

USD/CAD broke out of a two-month rectangle pattern trading range yesterday following a rally on Monday, which tested the top of this pattern that has held as a strong resistance since May.

Prior to its consolidation, USD/CAD has been falling steadily for the past four years following its top in 2002.It made a new low at 1.0926 in May, the lowest since 1991.As is common in strong trends, the price became oversold and tried to move higher but got rejected to the upside and subsequently sold off forming a rectangle trading range. This is a series of sideways price fluctuations bounded on both top and bottom by horizontal lines. Looking at the chart below, we can see that price has been trading within the range until its eventual break out yesterday. In the case of USD/CAD, it is bounded at the top by the red horizontal line (1.1273) and at the bottom by the magenta horizontal line (1.0973).So where does USD/CAD go from here?

In order for us to ascertain how far this pair might go based on this pattern, we will measure the width of the range and then project it from the breakout point which will give us a price target of about 1.1574.The most visible technical resistance before the pattern price target is the 200-EMA at 1.1421 which lines up with the pair’s early April’06 low at 1.1425.However,the action of momentum indicators on both the daily and the weekly (positive divergence) charts which has confirmed USD/CAD’s breakout should propel it through the above levels probably leading to a retest of the April’06 high(1.1771).

Figure 1:Daily Chart

Figure 2: Weekly Chart

On the whole, although the long-term trend is still down, this new development should push the pair higher and skew the short term outlook towards the upside. In addition, any pullback should now be contained by the above- mentioned resistance turned support

Happy Trading