In the past few days, the Loonie was the weakest currency among the majors. There was no specific event to cause it, but a combination of statements and some economic numbers led to a change of sentiment. After a speech of Bank of Canada Governor Carney markets assumed a view that the central bank will retreat from its tightening bias. As a reminder, for most of 2012, there was a wide spread speculation of increase in interest rates in Canada late in the year in effort to withdraw monetary stimulus. In his speech, Carney effectively eliminated the prospect of rate hike and falling inflation on Friday seemed to support this attitude.
Two events this week will keep the Canadian Dollar in the spotlight. We have both the policy meeting by the BoC and a monetary policy report. Analysts expect the CAD weakness to continue, but I disagree. Even if the central bank will officially become more dovish than before, it will not cut interest rates, but simply leave them at the current level. This will simply push the prospect of a hike farther into the future, something that markets have been dealing with all year long. Loonie’s weakness is probably running its course, especially if the BoC does not take new easing steps, which nobody expects.
This weakness in the Canadian Dollar is easily visible in the AUD-CAD. We can see a strong rally, away from my intended sell at 0.9910. However, the price is reaching a cluster of technical resistance levels, which could cause a strong corrective move. Using the daily chart, a strong bearish candlestick pattern would be a sign to sell. I am taking about a shooting star, doji or am engulfing line, which could send the price down back to at least 1.0050. If the AUD-CAD develops a more subtle candlestick pattern, like a dark cloud cover, for example, the 4H chart will be a better tool for a short entry.
The daily chart of the CHF-JPY is a good example of what we would like to see in the AUD-CAD. This pair shows a well-defined shooting star followed by an engulfing line, which is a decisively bearish combination. In addition, the MACD indicator is flashing a divergence, another negative sign. Here I want to go short at the open, with objective of 70 pips. In case of a wide gap, I will abandon the trade as that could skew the technical picture. Instead, my focus will shift to gap trades, much as it happened last week. Have a great trading week!