Canadian Dollar (CAD) Triangle Breakout Watch

Cory Mitchell, CMT

The Canadian dollar index tracks how the CAD is doing relative to a basket of currencies. The basket is the Euro (EUR), U.S. dollar (USD), British pound (GBP), Swiss franc (CHF), Australian dollar (AUD), and Japanese yen (JPY). 

The Canadian dollar index is, therefore, a summary of how the CAD is doing against those other currencies. Indexes are also useful for comparing the strength of various currencies using their index performance. This may aid in trade selection when comparing two similar trades, such as buying the CAD/USD or AUD/USD, for example.

Canadian Dollar Triangle Near Support 

Following the 2016 low—after oil got crushed lower and the CAD along with it—the "loonie" has been making higher lows, although just marginally from 2018 onward. This has created a support band between 74 and 72.50. 

It is between 77 and 74 that the triangle has formed. The height of 3 (77 - 74) can be added or subtracted to the triangle breakout point for a potential price target. Also watch for trades along the triangle trendlines, for example buying near triangle support. That tactic is discussed in this free strategy video.

The target estimate for an upside breakout is 79.50, while the target estimate for a downside breakout is 72.2.

Given that the price has already tested the support area twice in late 2018 and early 2019, an upside breakout is slightly more plausible than a downside breakout. If oil continues to push higher that would help push the Canadian dollar higher as well.

If the price breaks below the triangle, it will be testing that support area. Over the longer-term, that could be another good point to look for Canadian dollar long trades...if the price can stabilize and move higher out of the support area. 

A breach of support, assuming it is not a short-term false breakout, indicates the Canadian dollar will continue to struggle, along with commodities and other commodity currencies like the AUD and New Zeland dollar (NZD). For further reading, see AUD Trade Ideas Following a Heavy News Week. 

Why Focus on CAD, and Not AUD or NZD?

The AUD and NZD are highly tradable currencies as well, and are presenting great trading opportunities on various time frames all the time. I wanted to focus on the Canadian dollar, though, because it has performed more strongly than the AUD and NZD over the last one, two, and three years. 

Therefore, if the Canadian dollar breaks out of its triangle to the upside, it is likely to perform the strongest of the three, as all three will likely rally.

If holding trades for a longer-term term, CAD currently appears the best of the three, and has a higher interest rate (1.75%) than the AUD (0.75%) or NZD (1%). This means CAD long positions collect more daily interest (or pay less interest if short a higher-yielding currency).

Therefore, when choosing between trading CAD, AUD, and NZD pairs on the long side, the edge goes to the CAD.

By Cory Mitchell, CMT. Join me on Twitter @corymitc.

Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.

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