Why I'm thinking consolidation for USD/CAD

If you look at the current FOREX PowerRatings (at least at the time of this writing) you will note that USD/CAD is bringing up the rear in terms of relative strength. This is a reflection of the dollar's recent weakness across the board, and of course specifically against the Canadian currency. The pair has today broken through the low posted last week at the end of the sharp sell-off from up near 1.1800.

As the chart below shows, USD/CAD has moved down to within close contact with the late January lows just below 1.1400. It would be no surprise at all to see the market find some measure of support there. Even if that gives way, there should be even stronger support at 1.1300.




At this stage I am very hesitant about getting overly excited about the potential for further declines. The chart below is why. It is weekly USD/CAD (data through Monday's close).



As readers of my previous analysis will know, I make use of the Bollinger Bands to give me an idea of trend potential. USD/CAD has basically been consolidating for quite a while now, which has really narrowed the Bands. The Band Width Indicator (BWI) plot at the bottom of the chart highlights just how close together they have gotten. It's not depicted above, but the current weekly reading is as low as the BWI has been since late 2002, right before USD/CAD started a drop of about 2000 pips.

You'd think that sort of thing would make me excited, and in the longer view it does. We have to keep in mind, however, that the Bands can stay narrow for long periods (EUR/USD is a good recent example). It is not until they start widening out that we get the real indication of a market starting to make its move. In this particular case, I think we are going to need to see USD/CAD break the 1.13-1.18 area on a weekly closing basis before we get excited. If that happens, and the Bollinger Bands start widening out, then I will be looking for a MAJOR move. Until that time, though, I think the best strategy is to think more in terms of the market still being in a longer-term consolidation.

John Forman is the author of The Essentials of Trading (Wiley). To celebrate the book's release later this month, there will be a special 24-hour only promotion with giveaways worth $1000s. Find out more at www.TheEssentialsOfTrading.com/special-offer.html.