Last week, the Bank of Canada raised the interest rate for the first time in seven years, thus reinforcing the downtrend in USDCAD, which has been in progress since the top at 1.3793 in May. In this respect, the hike itself is hardly the reason for anything. Despite the fact that the U.S. dollar lost over 200 pips more against the Canadian counterpart after the news, that decline was in the direction of a price move, which has been in progress for over two months already. On the other hand, on May 8th, when the rate hike was not even a rumor, we sent the following daily chart of USDCAD to subscribers. It shows how not only the post-hike drop, but the entire decline from roughly 1.3800 could have been predicted with the help of the Elliott Wave Principle.
For most people, a price chart is something that simply visualizes the price movement and is useless for anything else. But to Elliott Wave analysts, the price chart of a financial instrument is much more important, because it helps us recognize the repetitive price patterns the market uses to reveal its intentions. In USDCAD’s case, back in early May, the daily chart of the pair allowed us to see that the decline between 1.4690 and 1.2460 was a five-wave pattern, called an impulse. The theory states that every impulse is followed by a three-wave correction in the other direction. As visible, the following recovery to 1.3793 took the shape of a W-X-Y double zig-zag retracement with a triangle in the position of wave X. And finally, wave Y terminated slightly below the 61.8% Fibonacci level.
Two months ago, any skilled Elliott Wave analyst could conclude that both the wave cycle and the Fibonacci level were suggesting USDCAD should be expected to reverse to the south for a significant selloff. The updated chart below shows what you already know.
USDCAD is currently trading around 1.2630. The pair is down by almost 1200 pips from the May high and is already approaching the previous major bottom at 1.2460. Waiting for the BOC to finally hike rates before joining the bears would have meant missing out on most of the selloff. Fortunately, the Wave principle put us ahead of the news once again. In that case, two months ahead.
