Why I’m thinking consolidation for USD/CAD

If you look at the current

FOREX PowerRatings
(at least at the
time of this writing
) you will note that USD/CAD is bringing up the rear in
terms of relative strength. This is a reflection of the dollar’s recent
weakness across the board, and of course specifically against the Canadian
currency. The pair has today broken through the low posted last week at
the end of the sharp sell-off from up near 1.1800.

As the chart below shows, USD/CAD has moved down to within close contact with
the late January lows just below 1.1400. It would be no surprise at all to
see the market find some measure of support there. Even if that gives way,
there should be even stronger support at 1.1300.


At this stage I am very hesitant about getting overly excited about the
potential for further declines. The chart below is why. It is weekly
USD/CAD (data through Monday’s close).


As readers of my previous analysis will know, I make use of the Bollinger
Bands to give me an idea of trend potential. USD/CAD has basically been
consolidating for quite a while now, which has really narrowed the Bands.
The Band Width Indicator (BWI) plot at the bottom of the chart highlights just
how close together they have gotten. It’s not depicted above, but the
current weekly reading is as low as the BWI has been since late 2002, right
before USD/CAD started a drop of about 2000 pips.

You’d think that sort of thing would make me excited, and in the longer view
it does. We have to keep in mind, however, that the Bands can stay narrow
for long periods (EUR/USD is a good recent example). It is not until they
start widening out that we get the real indication of a market starting to make
its move. In this particular case, I think we are going to need to see USD/CAD
break the 1.13-1.18 area on a weekly closing basis before we get excited.
If that happens, and the Bollinger Bands start widening out, then I will be
looking for a MAJOR move. Until that time, though, I think the best
strategy is to think more in terms of the market still being in a longer-term

John Forman is the author of
The Essentials of Trading
(Wiley). To celebrate the book’s release later this month, there will be a
special 24-hour only promotion with giveaways worth $1000s. Find out more