[Calxy]

•The risk aversion theme remains the most important driver of investor behaviour in the current market environment.
•Price action in equity markets continues to serve as “ground zero” for movement in other asset classes.
•With USD/CAD failing to pierce a key resistance level at 1.3017 over the past three months, the retracement phase in USD/CAD may be at a mature stage.

Medium-Term Technical View: Corrective Rally Losing Momentum?

Resistance Located at 1.1814 and 1.2030 as Uptrend Matures
USD/CAD is struggling to sustain a break above resistance at 1.1663 as the daily technical valuations reach an overbought extreme. USD/CAD has been in a corrective phase since early June, when risk aversion levels began to increase after U.S. equity markets and crude oil prices reached a peak. We note that the advance is beginning to falter as prices approach 38.2% Fibonacci retracement of the March-June decline at 1.1655 as well as a 4-month resistance trendline at 1.1663. The loss of upward momentum is being largely driven by the extremely overbought nature of the daily studies – which are at their most overbought levels since late 2008. Given these developments, resistance defined by 1.1814, 1.2030 and 1.2265 is likely to limit the current advance for a pullback to support at 1.1408. Prices will have to register a daily close below this level in order to produce a bearish trend change and resume the intermediate downtrend, highlighting secondary support at 1.1222 and 1.0941.

Long-Term Technical View: Valuations Becoming a Concern

Monthly USD/CAD Candle Chart: Retracement Begins to Falter Near 1.3000


50% Fibonacci Retracement at 1.2623 Repels Corrective Phase
The long-term retracement phase in USD/CAD may be coming to an end near the 1.3000 region after the monthly studies issued a sell signal from overbought levels. The long-term retracement phase that began from the secular low at 0.9056 in November 2007 has stalled near the 1.3000 area given the formation of a double top pattern. The price peak at 1.3063 has been amplified by the fact that the monthly studies have issued a sell signal from overbought levels. In turn, the failure to sustain a monthly close above 50% Fibonacci retracement of the 2002-2007 decline at 1.2623 is another indication that the influence of the USD bulls is eroding as a potential “A-B-C” Elliott Wave correction plays out. Given that the probability of a price top is increasing, resistance levels at 1.1783, 1.2137 and 1.2623 are expected to attract selling interest for another test of initial support at 1.1351. A monthly close below this level would favour a deeper selloff to redrawn support at 1.0875 as the monthly studies attempt to resolve their overbought readings. A close below this level would be a very bearish development that would produce a trend reversal and highlight the 23.6% retracement level at 1.0742, followed by 1.0378. Prices will have to exceed the long-term resistance trendline at 1.2997 in order to nullify the bearish evidence that is mounting for USD/CAD.