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USD/CAD Deep Dive: Retracement or Further Downside?

Check out my previous USDCAD deep dive here to see how we have progressed...

Price has progressed quite a bit since the latest USDCAD deep dive in March. Price has in fact continued pushing lower and continued the long-term downtrend. We have also broken through where I expected to see some consolidation (which we did) at 1.228, and we have now formed a new lowest support at 1.2025. This is now a 600-pip move which I have accurately predicted.

Price just rejected the 1.214 level, which lines up as the range's resistance which is just below the H8 bearish OB, an area where traders who went short at 1.214 have their stop losses, and hence price is likely to head towards there to take out their stop losses before reversing and continuing to the downside.

We're seeing a couple of mid-tier news releases coming out today and over the next couple of days, including the second Q1 2021 GDP reading, initial jobless claims, pending home sales, and core durable goods orders. If we see more employment or a higher GDP revision than expected, we may see some fast-paced moves to the downside.

Conversely, if we see the economy become weaker than expected, we could likely see price come back to previous support levels such as 1.228, if not higher at 1.238. Look out for the data first before taking any action in the market.

The downward trend in initial jobless claims continues. The overall trend of jobless claims is no doubt still moving in the right direction, and participants are still getting more and more confident that we could see a fast recovery of the labour market despite the dismal print we saw in the April NFP.

Following the previous FOMC meeting, and especially after the Minutes, more attention is placed on the labour data as the market tries to figure out when the point of “substantial progress” has been reached. However, with close to 8 million jobs still shy of pre-pandemic levels, there is still a very long way to go before it seems the FED will be impressed.

Looking at retail sentiment above, we can see that most traders are long on this pair. Retail traders are likely trying to find support at these nearby levels and push to the upside, likely to the channel's top at around 1.23.

Depending on the outcome of the next couple of news events, I am expecting price to move somewhat like the arrows above. I expect banks and other financial institutions to try and take out retail trader's positions that have gone short at 1.214. Once we see price reach the bearish OB, I will be looking to go short following successive price action confirmations of a rejection to this level.

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