USD/CAD Break of 1.30 seen as "Nice Bearish Signal Indeed"

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- USD/CAD has weakened after strong run of data

- Further weakness possible assuming break below 1.31-30 occurs say analysts

- "A break of 1.30 which would be a very nice bearish signal indeed"

The USD/CAD pair is currently the weakest in the G10 having suffered a decline to 1.3127 amidst an ongoing Canadian Dollar recovery.

Part of the reason for the rebound is that the Canadian economy looks in good shape after two especially strong data releases on Friday.

Retail sales showed rise of 2.0% - double the 1.0% forecast, and inflation data rose 2.5% in June from 2.3% expected. Higher inflation can lead to currency gains if it suggests the central bank will raise interest rates.   

On Tuesday API crude oil inventory data showed a greater-than-expected drop in oil reserves of 3.16m barrels. This tends to reflect higher demand, which in turn tends to lead to higher prices. Higher oil prices tend to mean a stronger CAD because oil is Canada's primary export.

Further OPEC is having a meeting this week to discuss how to manage supply which is also likely to affect prices.

Given the sharp volatility in CAD pairs, analysts are focusing on it, especially USD/CAD.

"Potentially a little fail here at the last time of asking," says Craig Erlam, senior market analyst at forex broker Oanda, looking at the USD/CAD chart. "I'm curious to see whether we will see a little bit of a breakout to the downside having already rallied quite strongly already.  We did find some support at the 1.30-1.31 region last time."

The analyst adds the market could continue to climb from here, "but I'm just wondering if the market is becoming a little bit cautious at these kinds of levels after having failed in this region; on previous occasions; after failing to make a new high".

"The first indication would be a break of that trendline and then a break of 1.30 which would be a very nice bearish signal indeed," says Erlam on his week-ahead broadcast.

Of a similarly bearish view, albeit after a while and not immediately so, is Shaun Osborne, FX Strategist at Scotiabank.

"We continue to view broader technical risks for USDCAD as being tilted to the downside," says Osborne, "following the late June bearish reversal (key weekly reversal signal) from the 1.3385 high (76.4% Fib retracement of the 2017 1.38/1.20 decline)," he adds.   

"We spot minor support now at 1.3065/70 but we also think a clear push through the low 1.31s should put USDCAD on course for a drop to the 1.28/1.29 region," he says.

The pair is testing support and trading with a bearish tenor, according to Nathan Batchelor an analyst at TradeCaptain.com, who sees a risk of a bearish 'domino effect' if the exchange rate successfully breaches 1.3100.

"The technicals remain clear on the USD/CAD, despite the stale price-action we are seeing. Sellers ideally need to move price below the 1.3100 level and take-out the 1.3050 level, which should provoke selling momentum, encouraging bears to attack towards the 1.2990 to 1.3000 support area," says Batchelor, who says 1.3220 is a key resistance level bulls would have to clear to pivot the outlook higher again.

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