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• CAD has recently broken key bullish levels versus USD, JPY and EUR. Aiding the process, oil prices have broken to 8-month highs, longer term oil prices have
  also risen to multi-month highs and indices of base metals prices have broken upward.

• This “green shoots” inspired CAD rally looks set to continue, though technical
  valuations highlight that the risk of a retracement is increasing.

• Recent CAD strength risks upending one of the factors the BoC anticipates helping support an economic recovery — “past depreciation of the Canadian dollar.” A sustained CAD rally could nudge the BoC toward something it clearly does not wish to do, seriously entertain quantitative easing.

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Last week saw a flood of upside employment surprises, not least in Canada where 35.9K jobs were created during the month of April compared to expectations of a decline of 50.0K. The unemployment rate remained at 8.0%, defying calls of an increase to 8.3%. On the surface this add another feather to
the “green shoots” hat, but the employment details paint a more muddy picture, if not worrying. Increased hiring was concentrated in the “self-employment” category, which increased by a staggering 37.0K, while the “employees” category declined by 1.1K. April’s surprise is unlikely to be repeated in the near future and this “green shoot” could wither as early as the next employment report to be released on June 5th. CAD bulls beware.

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The early April break below an ascending triangle base at 1.2268 signaled that a change in sentiment was underway for USD/CAD. With market sentiment reversing from bullish to bearish in this regard, prices have managed to take out key support levels at 1.2030, 1.1885 (200-day moving average), 1.1826 and 1.1661. Although the oversold nature of the daily studies suggests that the pace of the recent selloff may slow, corrective bounces to resistance at 1.1661 and 1.1826 are expected to attract renewed selling interest for a test of initial support at 1.1477, followed by 1.1313. Should the recent equity market rally begin to falter, we note that USD/CAD will have to register a close above 1.1846 in order to nullify the downtrend.

Recent Downtrend Valid While Below 1.1846