by Nico Isaac
Updated: July 20, 2017
Today we're headed to the "Great White North" to discuss the recent transformation in the U.S. dollar/Canadian dollar currency pair; and more importantly, why some forex traders may have missed the dramatic move altogether.
Let's start at the beginning, with the following USDCAD chart in early May. At the time, the Canadian dollar (or "loonie") was worse for wear from every possible angle. It had just endured its second-longest losing streak against the U.S. dollar ever, and was circling its lowest level against the buck in 15 months.
As for where the loonie was headed next -- well, many saw the currency's bearish fate sealed by a slate of negative factors, such as plunging oil prices, dovish central bank policy, and a faltering Canadian housing market. Wrote the May 5 Huffington Post:
"Canadian dollar is worst-performing currency of 2017 so far. The loonie is the ugly duckling of the currency world." (May 5 Huffington Post)
"The loonie has no friends... the risk remains to the downside." (May 2 Financial Post)
But then, the unexpected happened. The "ugly duckling" currency changed into a soaring swan. In just two months, the loonie erased an entire year's worth of losses, rallying to a 14-month high against the U.S. dollar in late July. (Chart inverted: the falling line means stronger loonie.)
Now, let's go back to the beginning once again, only this time, assessing the USDCAD from an Elliott wave perspective.
On May 3, our Currency Pro Service analyst Al Graham (in for Tony Carrion), explained how a "delicious opportunity" for loonie bulls was underway on the USDCAD's price chart; namely, the completion of a five-wave rally from January:
"A warm Howdy-Doo to all you Pacific Rim Wavers as we embrace the Thursday Asian session of currency trading. This market deserves your extra attention over the coming day and more, starting now. At longer term bigger wave degree, the entire projected five wave rally sequence from the January low is now waning... and the next anticipated big move is for that overall rise to be more than fully retraced starting soon... which constitutes delicious opportunity.
"At short term small wave degree, yes... the big top might be in place at the 1.3758 existing high for the move... but I strongly suspect not. Price would need to print below 1.3680 to initially solidify the case for viewing the 1.3758 high as the big top." Al Graham for Tony Carrion
The next chart replays the U.S. dollar's sharp reversal (and loonie's sharp rally) that followed, propelling the Canadian currency to a 14-month high on July 18.
As for where the loonie is headed next, the answer isn't in future central bank policy or oil prices or any other economic indicator. It's here and now, in the Elliott wave pattern underway on the USDCAD's price charts.