The Bank of Canada retained their neutral position overnight, which provided a further boost for CAD crosses alongside stronger oil prices and the slightly dovish FOC minutes.
Summary of BoC May 2017 Statement
- BoC maintained its target for the overnight rate at 1/2 per cent
- Three measures of core inflation remain below two per cent
- Wage growth is still subdued
- Growth will gradually strengthen and broaden over the projection horizon
- Economy’s adjustment to lower oil prices is largely complete
- Recent economic data have been encouraging,
- Consumer spending and the housing sector continue to be robust
- Macroprudential and other policy measures, while contributing to more sustainable debt profiles, have yet to have a substantial cooling effect on housing markets.
- Export growth remains subdued,
- Current degree of monetary stimulus is appropriate at present,
After 5 unsuccessful attempts to break above the monthly R1 pivot, EURCAD rolled over to a 6-session low and shows potential to extend losses over the coming sessions. The break lower confirmed a bearish divergence with RSI and we suspect the near-term may provide short opportunities. We could either trade the daily timeframe or fade into perceived pullbacks on lower timeframes.
Whilst there is a bearish divergence, this is only a near-term signal and not a call for a reversal. Price continues to provide higher high and lows, which is also confirmed by the trend on RSI. In fact, we expect any downside of price to be limited by the retracement of the RSI to its own trendline.
Further out we expect EURCAD to eventually break to new highs. Weekly RSI has not yet reached 70 and neither does it provide a bearish divergence, which suggests there is further upside potential over the coming weeks or months. At current prices however we are on track for a bearish inside week, yet if losses are to extend over the next two sessions then we could be in for a dark cloud cover or perhaps a bearish engulfing candle depending on how further losses may prove to be.
Yesterday’s break of 1.058 support broke beneath the weekly pivot and 50 eMA (H4) and confirmed a triple top pattern. If successful, the pattern projects a minimum target to 1.4950 which coincides almost perfectly with the weekly S1 pivot. As the weekly pivot puts a downside bias for the week and we also have the 50 eMA and triple top neckline as resistance, we see this as a suitable threshold to consider fading into any intraday rally whilst also helping place stops above it. A break above the weekly pivot invalidates the triple top pattern.
We do not yet expect price to break beneath the 1.4824 low as this also sits around the 200 eMA (H4). Chances are the daily RSI will also be above the trendline, so for now at least the short-term is counter-trend as opposed to calling a top in EURCAD. Of course, if losses turn out to be direct and volatile then this will have to be reconsidered as price develops.
Matt Simpson | Senior Market Analyst
A certified technical analyst, combining macro themes, monetary policy and business cycles to generate Forex and commodity trade ideas.