Talking Points:

– USD/CAD pressing higher above the 1.31 handle on $45.00 Crude Oil breakdown

– Canadian CPI data ahead might induce volatility for the pair

– GSI is a powerful big data indicator that can help you determine whether short-term trends will continue or reverse

The USD/CAD is continuing to push higher above the 1.31 figure (at the time of writing) perhaps on the backdrop of a slight pause in the “risk on” rally and continued weakness of Crude Oil prices with a breakdown below the $45.00 figure.

The Canadian CPI data ahead appears to be the main scheduled event risk for the pair, and could potentially affect the market’s perceived BoC monetary policy outlook.

Taking this into consideration, we look to find short term trading opportunities using the Grid Sight Index (GSI) indicator.

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Canada’s June Consumer Price Index figures are set to hit the wires 12:30 GMT. Headline CPI is expected to show a slight slowdown and print 1.4% versus the prior 1.5% figure, while Core inflation is set to head in the same direction for a 2.0% print versus the 2.1% prior figure. Adding to the mix will be Canada’s Retail Sales data, which is set to slow as well to 0.0% from the prior 0.9% on a monthly basis.

The wider implication for the figures here are possible influence on the market’s perceived BoC monetary policy outlook. The market could potentially have a “straightforward” response to the figures, as the BoC seems to be in somewhat of a neutral position relative to other central banks. Below expectations CPI and retail sales readings could indicate that the BoC will keep policy accommodative for the foreseeable future. With that said, further positive data could potentially force Governor Poloz to adopt a more hawkish tone.

In the meantime, USD/CAD is starting to see correlation with Crude Oil prices pick up over the last couple of trading days, with 10-day correlation almost doubling since the last report to -0.46 at the time of writing. This could perhaps imply that Canadian Dollar weakness in the last couple of days was at least to some degree caused by lower Oil prices and the recent break down below the $45.0 level.

USD/CAD 5-Min GSI Chart: July 22, 2016

The USD/CAD is trading at an area of resistance around 1.3135 (see chart below) at the time of writing. The GSI indicator above calculates the distribution of past event outcomes given certain momentum patterns, and can give you a look at the market in a way that’s never been possible before, analyzing millions of historical prices in real time. By matching events in the past, GSI describes how often the price moved in a certain direction. At the moment, past events indicate about an even movement to either side.

You can learn more about the GSI here.

USD/CAD Technical Levels:

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We use volatility measures as a way to better fit our strategy to market conditions. The USD/CAD has seen reduced volatility, trading sideways since the Brexit vote. With that said, the pair is currently seeing an attempt to break out of long term wedge consolidation. The event risk ahead, combined with a potential further decline in Oil Prices might just be the catalyst required to send the pair higher still. In turn, this could imply that breakout and trend oriented plays might be appropriate ahead.

USD/CAD 30-Min Chart: July 22, 2016

The USD/CAD is currently trading near a resistance zone above 1.3135, which is also in proximity of a descending trend line from May 24 which indicated a long term wedge congestion period. The pair broke above the trend line and might now need to clear this resistance area before focus might be put on possibe resistance at the zone below the 1.32 handle, an area around the 1.3250 figure and the round 1.33 level.

Levels of potential support on a move lower may be 1.31, an area below 1.3080, 1.3050, possible key support below 1.3030 and the 1.30 big figure.

When price reaches those levels, short term traders might use the GSI to view how prices reacted in the past given a certain momentum pattern, and see the distribution of historical outcomes in which the price reversed or continued in the same direction. We generally want to see GSI with the historical patterns significantly shifted in one direction, which could potentially be used with a pre-determined bias as well.

A common way to use GSI is to help you fade tops and bottoms, and trade breakouts. That’s why traders may want to use the GSI indicator when price reaches those specific pre-determined levels, and fit a strategy that can offer a proper way to define risk. We studied over 43 million real trades and found that traders who do that were three times more likely to turn a profit. Read more on the “Traits of Successful Traders” research.

Meanwhile, the DailyFX Speculative Sentiment Index (SSI) is showing that about 42.6% of FXCM’s traders are long the USD/CAD at the time of writing, after flipping net short yesterday. Judging by the price action and the SSI swings, it appears traders are trying to pick a top in the pair. Range bound trading conditions might coincide with retail traders more successful periods (See the “Traits of Successful Traders” research), which could imply weakness ahead, but given the crucial point the pair is currently positioned in (possible major break out), with the aforementioned event risk potentially pushing the Canadian Dollar lower; this could see the SSI better used as a contrarian indicator.

You can find more info about the DailyFX SSI indicator here

— Written by Oded Shimoni, Junior Currency Analyst for DailyFX.com

To contact Oded Shimoni, e-mail oshimoni@dailyfx.com