As US sentiment retreats following the Fed’s decision to back-track on its recent talk which hinted at a June rate hike, the Loonie could be setting up for a sizable slip. Specifically, a potent combination of technical indicators is providing some strong signals that last year’s lows could be tested once again. However, just how long this could take is somewhat up in the air at present.
Looking at the daily chart, it is clear that there remains some scope for additional upside movement in the near future. Primarily, the 12 and 20 day EMA’s are becoming increasingly bullish which is threatening to cause the 100 day EMA to climb higher. Furthermore, Parabolic SAR has just switched over which indicates that the Loonie isn’t done climbing just yet.
However, the short-term bullish potential of the pair is masking what could ultimately be a highly bearish long-term movement for the Loonie. Again looking at EMA activity, the 100 day average has been a fairly reliable source of dynamic resistance in recent weeks. Consequently, it is likely that the EMA will prove to be the turning point for the pair once again. Interestingly, a reversal at this point would see the final leg of a butterfly pattern begin in earnest.
In the event that the Loonie does start the final leg of a butterfly pattern, the resulting plunge could take the pair back to the lows seen in May 2015. Whilst this plunge is likely to take place, just how long the pair takes to reach the 1.12 support remains unclear as some strengthening US results could disrupt the final leg. However, after retreating to the 1.12 handle, the USD/CAD would likely recover to some extent, as is the normal outcome of this particular chart pattern.
Ultimately, the ball is largely in the US’s court at present and eyes will be on the nation’s indicator results. In the absence of significant and widespread improvements in US data, the Loonie is poised to resume following the bearish trend-line which dominated the charts in previous months. Moreover, the particular combination of technical indicators could exacerbate any downside potential for the pair going forward.