The USD/CAD fell close to 1400 pips from the May 2017 highs into the July lows. In August the currency pair retraced over 350 pips topping out at 1.2777. Since the high that was struck on August 15, the USD/CAD has once again moved back under the July lows and is now trading more than 500 pips below that August 15 high.
On Wednesday, September 6, the Bank of Canada increased its benchmark interest rate to 1%. Following the announcement of this news, the USD/CAD moved lower, breaking down under a key support level at 1.2330, signaling that further follow through to the downside was likely.
Now along with the move lower in the USD/CAD, the U.S. Dollar Index (DXY) has also continued to move lower. The U.S. Dollar Index is already deep into its support zone for its potential wave 4. The USD/CAD, on the other hand, is still about 300 pips over the longer-term target zone, which comes in at the 1.1754-1.0986 area.
So, whether the USD/CAD and DXY Index will find a bottom simultaneously is still somewhat uncertain. What is more certain is that neither the DXY nor the USD/CAD have shown any signal of having formed a bottom just yet.
I have been looking for these lower levels on the USD/CAD for quite some time. In fact, ever since the pair made a large degree 5 wave move down into the May 2016 lows, I was expecting to see another large swing lower. I will note, however, that the correction from the May 2016 low into the May 2017 high took much longer than I had expected. From a price perspective, however, it has followed the pattern almost perfectly.
As noted above, the 1.2330 was a key short-term support level that I had been keeping a close eye on this week. Once that level broke to the downside, it gave us confirmation that the move down off of the August 15 high was likely to follow through down towards at least the 1.2162 level and potentially as low as the 1.1699 level.
Now that the 1.2162 support has broken, the door is open for the pair to see a fairly clear path directly down towards the 1.1699 level. We do, however, need to hold under the 1.2374-1.2238 resistance zone if we are going to see direct follow through down towards those levels. A break back above the 1.2374 level would be the initial signal that we may have formed at least a local bottom in the USD/CAD.
Although the USD/CAD has yet to reach its target zone, I am certainly becoming much more cautious to the short side continue to extend lower. With that being said, as long as the pair holds the 1.2374 level that zone is still well within reach.
Mike Golembesky is a widely followed Elliott Wave technical analyst, covering U.S. Indices, Volatility Instruments, and Forex on ElliottWaveTrader.net (www.elliottwavetrader.net), a live Trading Room featuring intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.