The long term Elliott wave pattern along with sentiment indicators suggest that the USD/CAD is forming a multi-year low. The pattern on the hourly chart confirms the longer term bullish bias and provides a high reward/risk entry point.
We have maintained that the USDCAD is forming a significant low. Our most recent quarterly report (technical outlook) focused on the fact that the USDCAD is close to completing 5 waves down from 1.6189. That report can be seen here.
The 5th wave of the decline, from 1.4002, takes the form of an ending diagonal. An ending diagonal moves with the trend but consists of overlapping waves (notice the arrow that shows how waves i and iv overlap). These terminal patterns are often fully retraced. As such, a multi year target for the USDCAD is 1.4000, which is also very close to the 61.8% retracement of the 1.6189-1.0340 decline. A less bullish correction would most likely test at least the 38.2% (.618 x .618 = .382) at 1.2574. This level matches up with the May 2005 high at 1.2732. We of course do not know what the form of the correction will be, but given that the bottom forming is from an ending diagonal, it is likely that the initial leg of the correction will be sharp.
Net speculative positioning on CAD futures (longs - shorts) as reported by the CFTC through the COT report is plotted on the chart above. One sided positioning indicates a sentiment extreme in the market and sentiment extremes lead to reversals. When speculators are extremely long CAD futures, USDCAD tends to form bottoms (a declining USDCAD indicates that the CAD is gaining on the US dollar?in other words, speculators that are extremely long CAD futures is equivalent to being extremely short USDCAD). The opposite can be said for tops in the USDCAD (this is how we called the top in February near 1.1800). With speculative longs on CAD futures at a record, conditions are ripe for the USDCAD to put in a significant low.
It is extremely important to monitor the intraday patterns. If the rally off of the low is not impulsive (5 waves), then it is probable that the USDCAD will drop to a new low (below 1.0400). However, the rally off of the low is impulsive and the correction is unfolding right now. The third wave of the correction (wave c) is expected to end in the 1.0477-1.0562 zone. This 61.8% to 38.2% of the 1.0400-1.0699 rally. Check the Daily Technicals every morning (approx 8 a.m. ET) for updates on this and other patterns.