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- USD/CAD forms bearish pattern with downside target

- Break below 1.3180 lows required for confirmation

- Potential for even steeper decline if channel breaks

The U.S. Dollar vs. Canadian Dollar exchange rate (USD/CAD) is trading at 1.3333 at the time of writing, up half a percent from the previous week as the U.S Dollar strengthens on an improved outlook for U.S. stocks.

From a technical point of view, our studies suggest these gains are unlikely to hold much longer and will probably eventually be undone by another wave of selling.

A pattern called a bear flag has formed on the USD/CAD chart which strongly suggests more downside for the pair in the near future. This particular example of a bear flag is ‘textbook’ in outline.

A break below the 1.3180 lows would provide confirmation of more downside to a target at 1.3100 initially at the level of the 200-day MA.

This is a conservative estimate as bear flags normally decline the same distance as the length of the ‘flagpole’ extrapolated below the flag, which in this case would suggest a sell-off to the lower 1.30s.

The location of the 200-day at 1.3098, however, and several other major moving averages (MA) in the 1.30s suggests the going may get especially tough for the downtrend below 1.31 and downside could be curtailed.

Both the weekly 50 and 200 MAs are situated in the mid-1.30s and these are likely to present a high hurdle to further downside.

The weekly chart shows the pair climbing steadily in an ascending channel and the bear flag forming within the channel. Despite the bullish trajectory of the channel, there is a risk the exchange rate could break out of the base of the channel and trigger a much deeper sell-off.

A move below 1.2940, for example, would confirm a clear breakout from the channel and signal a move down to 1.2625.

Momentum is also strikingly bearish on the weekly chart and supports the forecast.

USD/CAD has declined due to a fall in the U.S. Dollar as a result of a switch in interest rate expectations - one of the primary drivers of foreign exchange.

Interest rates had been expected to rise significantly in 2019, but then a steep sell-off in the U.S. stock market and increasing growth fears led to a re-assessment of that view and reduction in the number of expected rate hikes.

Now the market expects interest rates to remain flat in 2019 - and since the Dollar tends to track rates it is expected to trade with a subdued tone too.

Initially, the more subdued outlook for the U.S. diverged with an improving outlook in Canada, which benefited the Canadian Dollar and probably contributed to the steep sell-off during the flagpole section of the pattern.

However, so tethered to is the Canadian economy to the fortunes of the American economy that the perceived slowdown across the border began to contaminate the outlook for Canada and after its most recent meeting the Bank of Canada also switched policies and adopted a neutral stance in relation to interest rates, which probably contributed to the technical consolidation during the formation of the ‘flag square’.

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