This trade idea was first sent to subscribers of the Free Profitable Forex Newsletter on July 14 2022.
Fx market rejects hawkish BOC decision
The Bank of Canada delivered a hawkish surprise yesterday, hiking rates by a larger 100bp (1.0%) compared to the 75bp (0.75%) that the market consensus anticipated. As you would expect, the Canadian dollar strengthened following the announcement, and USDCAD collapsed by around 90 pips.
However, after some stabilization overnight, USDCAD rebounded strongly during today’s European morning and is now extending the move higher, breaking above a key resistance in the 1.3050 zone see chart below).
This is essentially the market telling us that it doesn’t care about the Bank of Canada’s hawkish decision. The fact that the market fiercely rejects such an important and big rate hike (and USDCAD is even 200 pips further higher) suggests that powerful bullish momentum may be developing here. In line with this, we are looking at a trade setup for how we can join this bullish move in USDCAD.
USDCAD technical breakout above key resistance
The bullish move is accelerating today after USDCAD broke above that key daily resistance zone around 1.3050 (zone stretched between 1.3040-1.3080). This resistance repelled bullish attempts on three occasions since May but finally broke this time.
How things progress from here - whether USDCAD goes another 100-200 pips straight higher or consolidates - is hard to say. However, chasing the market is rarely a good entry strategy. Instead, in most cases, it’s better to wait for some pullback or consolidation and then look for opportunities to join long.
And it looks as if it could be the same with the current USDCAD situation. The pair hit a high of around 1.3220 and is now retracing down back toward 1.3150. Perhaps the pullback we are looking for has already started?
Today’s USDCAD candle is already 260 pips tall, suggesting further upside price action may be harder to come by. USDCAD is heavily overbought on short-term timeframes, and some consolidation is much needed.
If things indeed progress in this fashion on USDCAD, we should look to join the bullish trend when the near-term overbought conditions subside. We can then look for some bullish setup or pattern on the short-term intraday charts like 1H or 4H to trigger our entry. Preferably, the entry should be closer to the 1.31 - 1.3050 support zone, but given the strong bullish momentum, it will be no surprise if the market doesn’t go as low.
- Look for an end to the current retracement/consolidation (e.g., intraday RSI and other indicators to move out of overbought)
- Then entry on a bullish pattern or signal on lower timeframes (4h, 1h)
- The stop can be under the bullish signal used for entry;
- The key is that USDCAD should not return below 1.3050;
- thus the final stop can be placed under 1.3050
- 1.35 zone (main target)
- However, there are no clear resistance zones to the upside. So, the 1.33 and 1.34 round number zones can each be used to take some profits.
- Further higher, the 1.40 zone would be the next objective above 1.35. It would likely require a more extreme global risk-averse environment to come into being, though.
Why a Hawkish BOC is not helping the CAD
The reason why the Canadian dollar is falling despite the Bank of Canada’s hawkish surprise is that the CAD is a risk-sensitive currency. So, yes the BOC’s rate hikes and hawkish stance are a positive for the currency on the one hand, but deteriorating global conditions and worsening risk sentiment are a negative.
Industrial metals are falling, stocks are under pressure, and even bond yields and oil are down this week. This is a clear signal from global markets that high inflation is quickly becoming yesterday’s story and investors are instead increasingly worried about a nasty global recession. Risk sentiment is obviously badly hurt, and investors are in full-on risk-averse mode.
And whenever risk sentiment is negative, risk-sensitive currencies like the AUD, CAD, and NZD take a beating, no matter what actions their central banks might be taking at the moment. This is nothing new. The global market environment usually takes precedence over domestic developments and what the domestic central bank may be doing. Global factors matter more, and this is what’s happening at the moment and why the US dollar continues to strengthen more.
Trade signals from the past weeks
- July 1, 2022 - Short NZDUSD from 0.6175 (open in progress)
- Short USDJPY setup was negated after the pair broke to the upside this week (trade idea sent July 8)
TOTAL P/L in the past week: N/A
TOTAL: +5855 pips profit since October 1, 2018