Next USD CAD Move Hinges on Euro Zone Announcement

A surprise announcement by the Bank of Canada on Tuesday helped put in a bottom in the USD CAD at .9990. The subsequent rally formed a daily closing price reversal bottom. A follow-through move through the previous day’s high at 1.0212 is needed today to confirm the reversal.

Once confirmed, the closing price reversal typically leads to a 2 to 3 day rally equal to at least 50% of the previous down move. Based on the short-term range of 1.0657 to .9990, this new upside target is 1.0324. Down trending Gann angle resistance is at 1.0337 today, making 1.0324 to 1.0337 a key resistance cluster.

Traders should also note that in order to reach the forecast target, the Dollar/CAD must cross a swing top at 1.0263. A move through this price will turn the main trend to up. Buying prematurely before the reversal bottom is confirmed could prove to be a risky trade since this is a momentum pattern. This means that the breakout through 1.0212 must be accompanied by fresh buying and short-covering.

Intraday traders should watch for a possible break back to 1.0101 to 1.0075. If support is established in this zone then look for traders to take another shot at breaking out to the upside. In order for this move to re-establish itself today, the USD CAD must get help from the activity in the Euro Zone.

Although the Bank of Canada left interest rates unchanged at 1.0%, this wasn’t enough to stabilize the Canadian Dollar since it also removed a reference to withdrawing stimulus from its economic growth outlook. This served as an indication that the central bank was picking up a signal of a weakening global economy. In its monetary policy statement the BoC acknowledged that its decision was based on the possibility that the situation in the Euro Zone would lead to a “brief” European recession and slow U.S. economic growth. For a country that relies on exports, the news that the central bank was looking for less demand from the U.S. surprised traders.

Everything else aside, the Bank of Canada was basically saying that it expects a short recession in Europeand a slow down in growth in the U.S. Calling out both major economies was a bold move by the central bank. There was no mention of China, but one has to believe that if the economies in Europe and the U.S. both turn down then China is sure to follow.

The announcement by the BoC was clearly precautionary. Citing potential weakness in Europe and the U.S. served as a notice to investors that it was not willing to take the chance that a solution to the Euro Zone debt crisis would lead to a quick turnaround in the global economy. Identifying slower growth means it can maintain the stimulus that has helped prop up its economy. The market reacted as if traders were anticipating more positive news, but the comment by the BoC was not ambiguous and traders reacted by selling off the Canadian Dollar.

With the USD CAD trading steady-to-lower this morning, it looks as if traders are giving the Euro Zone finance ministers the benefit of the doubt. If the EU plan disappoints traders then look for this currency pair to surge to the upside. If the plan calls for more funding than the currently anticipated Euro 1 trillion ($1.39 trillion) then sentiment could shift to risk on and the Dollar/CAD will erase much of Tuesday’s gains.