Mapping the Market: Canadian dollar could make a comeback against US dollar

The Canadian dollar has lost ground to the US currency ​for more than a month, but that may be starting to change, technical ​analysis suggests.

Click here for a detailed technical analysis chart. Technical ‌analysis ​uses charts of past price moves to help predict where a market might go next. Analysts look especially for support and resistance. Support is a price level that acts like a floor when a market is falling. Resistance acts like a ceiling when a ‌market is rising. Traders often find these levels using previous highs and lows, or moving averages. A moving average is the average price over a set number of days, drawn as a smooth line that shows the underlying trend.

The Canadian dollar is usually quoted as Canadian dollars per US dollar, so a falling line means the Canadian dollar, also called the loonie, ‌is getting stronger. From late August to early October, the US dollar gained about 4% against the loonie. It reached a 1-1/2-year high of 1.43 Canadian dollars, according to ‌data supplied by LSEG. The climb was driven by rising US bond yields and expectations that the Federal Reserve would be aggressive in raising interest rates. Higher rates make a currency more attractive to investors.

That began to change over the last week or so. US bond yields retreated, and investors reconsidered how much tightening they expect from the Fed. This has given the loonie an opening, and it has pulled the US dollar lower, ⁠wiping out ​more than a third of the earlier rally. ⁠Markets rarely move in a straight line, and pullbacks of this size are common. The next step is to see whether the loonie can keep its momentum. If it pushes the US dollar below 1.4039, where ⁠the 100-day moving average sits, that could open the way to further gains. Traders would then target the 200-day moving average at 1.3880. Analysts watch that line closely because it reflects the long-term trend. Below ​that is 1.3734, the August low and the starting point of the US dollar's most recent rally against the loonie.

On the other hand, there is also a ⁠risk that the pullback fades. If the US dollar rebounds above the 21-day moving average at 1.4185 and the 10-day moving average at 1.4208, the loonie's recovery prospects would dissipate. Those shorter-term averages show where prices have been trading ⁠recently. ​The US dollar could then make another attempt to break through resistance in the 1.43 to 1.44 zone. What the chart shows:

• The US dollar rose about 4% against the loonie from late August to early October, reaching 1.43, then gave back more than a third of that gain • A fall below the 100-day moving average at 1.4039 ⁠could target the 200-day moving average at 1.3880, then the August low of 1.3734

• A rise above the 21-day and 10-day moving averages at 1.4185 and 1.4208 would dim the ⁠loonie's recovery hopes and put resistance at 1.43 ⁠to 1.44 back in play (Mapping the Market is a daily column written by Reuters journalists. The commentary is based on a technical analysis of financial charts, which helps assess the likelihood of future price moves but does not guarantee the outcome. The column does not ‌constitute investment advice or ‌trading recommendations.)

(Robert Fullem and Paul Spirgel are Reuters market analysts. The views expressed are their ​own. Editing by Burton Frierson and Barbara Lewis)