Executive Summary
- Bank of Canada cut interest rates 50 basis points on Wednesday
- Prices may be approaching a medium-term top
- The bearish Elliott wave count remains valid so long as prices are below 1.3947
Bank of Canada Lowers Interest Rates
On Wednesday, the Bank of Canada reduced their central bank interest rate 50 basis points from 4.25% to 3.75%. This is a deviation from the previous three policy meetings where each meeting resulted in a 25 basis point cut.
Since June 2024, BOC has reduced their interest rate 1.25% while the Fed has reduced by only 0.50%. During the Fed’s next meeting on November 6, another 25 basis point cut is anticipated.
For the past several months, BOC has been more aggressive in their rate cutting than the Fed has been. This keeps the pressure on a relatively strong USD against a relatively weak CAD.
From an Elliott wave perspective, the small decline in late September does not have a harmonic relationship with the August decline.
Therefore, we can assume that the three-wave rally beginning in September is part of a larger Elliott wave pattern. Under that model, we are looking for a bearish reversal prior to the 1.3947 high.
Back on August 5, USDCAD carved a bearish shooting star candlestick pattern that kicked off the August decline. A retracement back up to retest the wick of this candle would be a nice way to finish the rally.
It appears USDCAD is in the final stages of that a-b-c rally. The ‘c’ wave needs to contain five waves and it appears USDCAD is in the fifth wave of ‘c’.
As a result, a bearish reversal may be just around the corner. If the bearish reversal takes hold, then we’re anticipating a new trend to below 1.3450. The decline should take on impulsive characteristics with down waves on smaller time frames unfolding as five waves while rallies are three waves. This forecast would remain valid so long as the price does not rally above 1.3947.
If USDCAD fails to decline in impulsive fashion, we’ll be on the lookout for a double bottom cup and handle pattern potentially developing.
Bottom Line
USD/CAD appears to be approaching a medium term top that could lead to a bearish trend driving prices below 1.3450. If 1.3947 is broken to the upside, then another pattern, possibly a cup and handle pattern, may be in development.
