EUR/CAD – Major Downside Opportunity
Between the weakness of the euro and strength of the Canadian dollar on Friday, EUR/CAD experienced a major downside break that opens up the opportunity for a deeper slide in the currency. While the Euro has been drifting lower, the Canadian dollar did not soar until the end of the week on the back game changing CPI figures. The annualized pace of consumer price growth in Canada hit 2.3%, its strongest level in 2 years. This was also the very first time in 2 years that CPI exceeded the Bank of Canada’s target. Considering that the BoC did not anticipate CPI reaching this target until the first quarter of 2015, this is big news that should cause the central bank to upgrade its economic forecasts and reconsider their monetary policy bias. The BoC does not meet for a few weeks but the prospect of a less dovish bias could drive the Canadian dollar higher. At the same time, euro is in play in the coming week with a heavy economic calendar that includes Tier 1 economic reports such as Flash PMIs and the German IFO report. If these releases surprise to the downside reinforcing the need for the ECB to ease, it could drive EUR/USD to 1.3500 / 1.3475, which would in turn drive EUR/CAD lower.
From a technical perspective, the next wave in EUR/CAD’s downtrend has already begun with the break of the 200-day SMA at 1.4735. The currency pair has been hovering around this moving average for the past week and finally broke through it with Friday’s reports. There has also been a major head and shoulders pattern forming that broke earlier this month but the move did not really gain momentum. Now that the 200-day SMA has broken, we believe it creates a major downside opportunity. There is no support at this stage until the 2014 low near 1.4400 and more significantly the 38.2% Fibonnaci retracement of the August 2012 to March 2014 rally at 1.4230. The downtrend would be negated if EUR/CAD rises back above 1.48.