Technical Sentiment: Neutral

Key Takeaways

• Housing Starts in Canada were up 1k, to 200k vs. forecast 194K;
• Double Top chart pattern stirs a small sell-off with larger potential;
• Uptrend at risk of reversal on a break below 1.0902.

An overextended USD rally is showing increasing signs of exhaustion that may lead to a larger correction in the coming days and weeks.

Technical Analysis

USD/CAD formed a perfect range was formed last week, with price boxed in tightly between the support at 1.0902 and the resistance at 1.0983/85. Each level now has two tests and subsequent rejections, making the next touch a very likely break-out opportunity.

The double top chart pattern, more than anything else, indicates a major weakness within the 5-week uptrend. Stochastic is located in overbought territory on the Daily chart, adding value to this view since it suggests a temporary top should form in this area in order to allow a bearish correction.

While price remains stuck between 1.0902 and 1.0983 it is important to first observe how it will react around 1.0930 (50 Simple Moving Average on the 4H time frame). USD/CAD has shown respect for this SMA line in the past, as a consequence a break or bounce should indicate the overall direction before the range itself breaks.

A bearish break below 1.0902 will invalidate USD/CAD’s recent structure of Higher Lows and take out a cluster of stop losses accumulated in this area. In this case we expect a rapid sell-off to commence. An immediate target is located around 1.0853/76, however the main area of interest will be the price pivot zone at 1.0820.

A bullish bounce starting from the 4H 50 SMA followed by a rally above 1.0985 will invalidate any bearish scenarios and mark the return of buyers, with interest extending as high as 1.1026 and 1.1052.

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Prepared by Alex Z., Chief Currency Strategist at Capital Trust Markets