Since peaking out in mid-March just shy of 1.13, USD/CAD has been making fairly rapid progress to the downside. With the market having now broken 1.07 to the downside, however, it is probably a good point to look for the volatility to ease off and some support to develop. A starting point for thinking that way is the seasonal pattern for the pair. It has generally been a negative one for the last several weeks, but over about the next month or so that shifts to a more positive bias. This certainly isn’t to say 2014 couldn’t see the market go against the historical averages, but it gives us a reason for caution when considering playing the short side from here.
Perhaps more significant, though, is the weekly chart pattern. As can be seen below, the market has now retraced to just above the peak from July 2013. That peak was in a rejection zone from the spike high of October 2011 and even when it was broken in December it took a few weeks before the market could muster enough strength to pull clear. That suggests strong resistance, which now likely means good support.
Of course one thing that could be seen as working in favor of a continuation in USD/CAD lower is the fact that the Bollinger Bands have only relatively recently begun expanding. Normally this would indicate a likely early-stage trend situation. In this instance, however, the Bollingers could continue expanding for a little while still without the market moving much as they catch up to the volatility seen of late.
What looks to be a good play from here is to watch for the market to move back up toward the area above 1.08 where it found support in May that was finally broken a couple weeks ago. That support should now be resistance if the market is to remain strongly bearish. Thus, a failed rally back in that direction would make for a good entry to play an eventual continuation to new lows for the move. And if the market can get clear above that resistance, then it’s probably not as weak as we might think.