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USDCAD’s Sudden, but Natural Plunge Explained

USDCAD’s lost ground this week reminds traders just how quickly things change in the Forex market. A week ago, on Friday 9th, the pair touched 1.2688. Five trading days later, the greenback is down to 1.2450 against the Canadian counterpart for a total loss of 238 pips or 1,88%. Higher inflation is considered as the primary reason for the U.S. dollar weakness not only against the Loonie, but against other major rival currencies, as well.

The bad news is you could hardly see it coming until Wednesday’s CPI report. The good news is that with the help of Elliott Wave analysis, traders could anticipate and prepare for the market’s reaction to such news. The chart below was included in the mid-week updates sent to clients on February 7th, putting them an entire week ahead of USDCAD’s recent developments.(some marks have been removed for this article)

usdcad elliott wave analysis february 7

In the middle of last week, the pair was hovering around 1.2510, but given the bigger picture outlook, we thought the recovery from the low at 1.2248 was supposed to evolve into a five-wave impulse. By February 7th, its fifth wave was still missing, which meant “wave (v) should lift the pair to 1.2600.

On the other hand, the Elliott Wave Principle states that every impulse is followed by a three-wave correction in the opposite direction. So instead of joining the bulls when USDCAD breached 1.2600 the next day, we were already getting ready for a bearish reversal. As the updated chart below shows, it did not take long for the bears to return.

usdcad elliott wave analysis february 16

The pair exceeded 1.2600 and climbed to almost 1.2700 on Friday, but that did not change the wave count in a material way. A week later today, USDCAD trades near 1.2460, allowing the large army of news analysts to explain the plunge with the increased inflation expectations. Elliott Wave analysts, fortunately, do not have to waste time wondering what caused what, because to us, USDCAD’s decline is just a natural three-wave pullback of the preceding impulsive sequence.



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