Earlier today, the U.S. dollar moved higher against its Canadian counterpart after the Bank of Canada left its interest rates unchanged. Additionally, official data showed that Canada's trade balance swung into a deficit of C$0.64 billion in April (while analysts had expected the trade surplus to narrow to C$0.10 billion), which also had a negative impact on the loonie. Thanks to these circumstances, USD/CAD climbed to a one-month high, breaking above an important resistance level. Will we see further rally in the near future?
In our opinion the following forex trading positions are justified - summary:
The trend seems to be down in case of both EUR/USD and AUD/USD, but keeping short positions in light of the cyclical turning point in the USD Index (with the previous move being up) and tomorrow's decision regarding interest rates seems too risky at this time. Consequently, cashing out of the short positions and taking profits off the table seems to be appropriate at this time. We expect to re-open these positions shortly - perhaps at even more favorable levels - if the dollar's turning point is as effective as it was in the past several cases.
EUR/USD
The medium-term picture hasn’t changed much as EUR/USD remains between last week’s high and low. Today, we’ll focus only on the short-term changes.
Looking on the daily chart, we see that the sitation in the very short-term hasn’t changed much as EUR/USD is still trading in a narrow range between the support zone created by the 76.4% and 78.6% Fibonacci retracement levels and the resistance zone based on the 200-day moving average and the upper line of the declining wedge. In our opinion, as long as there is no breakout above this resistance area (or breakdown below the 78.6% Fibonacci retracement), we won’t see another sizable move. At this point ist’s worth noting that if we see a breakout, the next upside target will be around 1.3720, where the 50-day moving average is. On the other hand, if the pair extends losses, we’ll see another re-test of the strength of the upper line of the declining trend channel (currently around 1.3570) or even a drop to around 1.3540, where the 88.6% Fibonacci retracement (based on the entire Feb.-May rally) meets the 141.4% Fibonacci extension (based on the Apr.-May rally).
Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: bearish
LT outlook: bearish
Trading position (short-term; our opinion): In our opinion no positions are justified from the risk/reward perspective as the space for further declines may be limited. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.
USD/CAD
The medium-term outlook hasn’t changed much as USD/CAD remains in a consolidation around the 23.6% Fibonacci retracement and the 2010 high. Therefore, it seems doubtful that we’ll see another sizable move before an earlier breakout above the upper line of the formation (or a breakdown below the lower line).
What can we infer from the daily chart?
Quoting our Forex Trading Alert posted on Monday:
(…) USD/CAD climbed above the medium-term support/resistance line, invalidating the earlier breakdown. This is a strong bullish signal, which suggests that we will likely see further improvement and another attempt to move above the upper line of the consolidation (marked with blue). If currency bulls do not fail this time, and we’ll see a breakout, the next upside target will be around 1.0987, where the 38.2% Fibonacci retracement based on the entire March-May decline is. Please note that buy signals remain in place, supporting the bullish case.
Looking at the above chart, we see that USD/CAD successfully broke not only above the upper border of the consolidation, but also above the May 21 high earlier today. This is a bullish signal, which together with buy signals generated by the indicators suggests that we’ll see further improvement. If the exchange rate doesn’t invalidate the breakout, we think that the above-mentioned upside target (around 1.0987) will be in play.
Very short-term outlook: bullish
Short-term outlook: mixed with bullish bias
MT outlook: mixed
LT outlook: bearish
Trading position (short-term): In our opinion no positions are justified from the risk/reward perspective as the space for further declines may be limited. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.
AUD/USD
The situation in the medium term remains unchanged as AUD/USD is still trading in the consolidation range, well below the previously-broken green resistance line, while sell signals generated by the indicators remain in place, supporting the bearish case.
Having say that, let’s examine the daily chart.
Looking at the daily chart, we see that although AUD/USD moved higher, the proximity to the previously-broken medium-term green line triggered a pullback earlier today. Therefore, we still believe that as long as this nearest resistance line is in play, another attempt to move lower can’t be ruled out. Please note that if the exchange rate extends losses, we will see another test of the strength of the support zone created by the May lows (marked with green).
Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: bearish
LT outlook: bearish
Trading position (short-term; our opinion): In our opinion no positions are justified from the risk/reward perspective as the space for further declines may be limited. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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