USD/CAD Challenges Key Daily Moving Average (1.2790)

It’s been a relatively quiet Friday on the forex, with only a few pairs making directional moves. One of the more active majors has been the USD/CAD. At press time, exchange rates of the USD/CAD have driven higher by 68 pips (0.54%). The bullish price action has come in the wake of a February WTI crude oil rally and slumping Canadian Retail Sales (Oct.) figures.

Aside from COVID-19, the key underpinning of the Loonie has been a prolonged uptrend in WTI crude oil. February WTI is trading above $49.00 ― a test of $50.00 appears inevitable by New Year’s Day. If this scenario unfolds, today’s bump in the USD/CAD is likely only temporary.

On the traditional economic news front, there were several numbers out today that influenced the Loonie. Here’s a quick look at the highlights:

Event                                                               Actual                     Projected            Previous

Canadian Retail Sales (Oct.)                           0.4%                            0.2%                   1.1%

Canadian Core Retail Sales (Oct.)                  0.0%                            0.2%                   1.0%

Baker-Hughes Rig Count                                 263                               NA                     258

To sum up, Canadian Retail Sales fell dramatically month-over-month. However, this was expected, so these figures aren’t that much of a shock. It looks like today’s price action in the USD/CAD is a product of short-covering, not shifting market dynamics.

USD/CAD Rallies, Tests Daily Moving Average

As you can see on the chart below, the USD/CAD hasn’t traded above its Daily SMA since November 24. This is an extremely bearish sign and indicative of the Loonie’s prevailing daily downtrend.

For next week, here are a few key levels to watch:

• Resistance(1): Daily SMA, 1.2790
• Resistance(2): 38% Current Wave, 1.2873
• Resistance(3): Bollinger MP, 1.2902

Bottom Line: Given the effectiveness of the Daily SMA as topside resistance, I’ll be going home short the USD/CAD at today’s close. With an initial stop loss at 1.2855, selling at market between 1.2780 and 1.2790 produces 50 pips profit on a sub-1:1 risk vs reward ratio.

Holding open positions into the weekend break is a risky proposition. If you are going to take this trade, be sure to implement leverage wisely and have your stops down ahead of this afternoon’s close.