Institutional analysts are watching key support levels in the USD v CAD exchange rate and warn the Canadian currency could be about to break to better levels against its North American rival.

“We suspect CAD will struggle on most crosses though, amid questionable local growth momentum as the weakness in the energy patch bleeds through the broader economy.” - Westpac.

The US dollar has staged a strong rally against the Canadian dollar ahead of the weekend; USD-CAD has risen nearly half a percent to reach 1.2063. These gains are however unlikely to convince leading currency analysts that we are witnessing a turn-around in fortunes for the USD.

The dollar is under pressure right across the board with the multi-month rally stalling and reversing. This has allowed the Canadian dollar to push the USD-CAD lower from 1.2817 in March down to 1.1919 in May.

“$/CAD is testing pivotal long-term support at the 1.1909/1.1915 area. While this is a very late stage decline, this support zone is unlikely to hold for long, given the weakened state of the US $. Indeed, a break below 1.1909 clears the way for a test of the 200d at 1.1764 before renewed basing,” says MacNeil Curry, technical analyst at Bank of America Merrill Lynch Global Research.

Note the red line in the above graph – this is the 100 day moving average. Note also that the USD fell below this line in mid-April, a negative technical event that confirmed to traders that negative momentum was setting into the USD-CAD pair. At the very least, the dollar must break above this level if we are to be convinced that positive momentum is returning.

Analysts at Westpac Research are also watching the key support level above 1.19 closely. In a recent forecast note the bank tells clients:

“A break of 1.1940 in USD/CAD, a key support level extending back to the BoC’s surprise rate cut in January, would likely open the door to further substantial losses. Even though we doubt the Canadian economy will bounce back as quickly as BoC Gov Poloz seems to think, the increasingly

grim USD picture warns that USD/CAD may well trade lower in coming weeks.

“We suspect CAD will struggle on most crosses though, amid questionable local growth momentum as the weakness in the energy patch bleeds through the broader economy.”

Scotiabank Not Keen on Chasing the Dollar Lower

Taking a more cautious view on USD-CAD is Eric Theoret at Scotiabank who points out that USDCAD remains closely tied to oil prices, its 30 day rolling correlation to WTI at 0.95.

“We note the potential for upside risk in USDCAD, given that it has recently diverged from oil amid a focus on this week’s data-driven USD weakness, leaving it vulnerable to adjustment in the event of a further decline in WTI,” says Theoret.

Furthermore, momentum signals have failed to confirm the recent lows in spot, hinting to positive divergence. USDCAD is also well off its recent lows near 1.1920 and has tested Wednesday’s open at 1.2019, shifting the focus to the 9 and 21 day MA’s at 1.2044 and 1.2103, respectively.”

In sum then, the outlook appears to rest on how the level at 1.1950 resolves. If it is broken we could well see further declines in the US dollar, if not consolidation and sideways traction will prevail until the USD finds its feet once more.