The USDCAD exchange rate touched 1.28 last week, but the bulls could not resist, which led to a decline of roughly 450 pips to as low as 1.2352. And while the larger uptrend is still in progress, the smaller time-frames suggest for more short-term weakness in USDCAD. The one thing, which brought us to this conclusion, is the wave structure of the recent sell-off. As the chart below demonstrates, it is a five-wave impulse.
The Elliott Wave Principle says that every impulse is followed by a three-wave correction in the opposite direction. USDCAD has already recovered in three waves, marked “w”. The reason we think this is not all of wave B is the fact, that wave 5 of A is extended. Fifth wave extensions are supposed to be fully retraced. That is why we expect wave B to evolve into a double zig-zag with wave “y” remaining. Furthermore, there is a 61.8% Fibonacci level coinciding with the starting point of wave 5. If this is the correct count, we should prepare for another leg to the north. It could bring USDCAD near 1.2630. According to the Theory, once the correction is over, prices should resume in the direction of the five-wave sequence. In other words, once wave B is over, the USDCAD rate should head down for wave C.
