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Waiting For Big Breakout in Canadian Dollar


Early in the year Canadian dollar futures rallied off the January low (0.6857) into an April high at 0.8. Since then, the December contract has been moving in a large triangle (or slightly descending wedge) pattern.  The pattern has been playing out for more than five months, with volatility continuing to decline.

Eventually the price will break out of this pattern, and a sizable move is expected. Based on the strength of the rally earlier in the year, the probability of another major upside move is greater than the probability of a large downside move.

The Canadian dollar typically tracks crude oil (CL). Not always, and definitely not perfectly, but it has been following it quite closely for the last several years in terms of direction (not necessarily magnitude of price moves).

Currently, oil is moving up, and has recently broken higher out of a triangle itself. If the Canadian dollar continues to track oil, then likely CAD will eventually break out of its triangle pattern to the upside as well. 

Figure 1. December Canadian Dollar Futures with December Crude Oil Futures

There are two targets for an upside breakout. In the short-term, an approximate target is the height of the triangle added to the breakout point. That would put an upside target near 0.82. Longer-term, the size of the initial rally can be added to the bottom of the triangle, providing a target near 0.87.

When large patterns form, expect false breakouts. On October 7 the price slipped slightly below prior lows, which could be considered a false breakout. It typically takes this sort of action to generate the momentum for a breakout on the opposite side of the pattern. That said, if a strong downside breakout occurs, then target is near 0.71.

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