Medium-term selloff for USDCAD comes into play

USDCAD is currently knocking on the ceiling of its well-defined trading range. Technically speaking, the setup is primed for rejection at this level, with the path of least resistance pointing south. As for the fundamentals, they are singing the same bearish tune. In fact, three big forces are now lining up to push the pair down—and they are actually game-changers.

1. Oil is on fire. 

WTI crude has settled in the $98–$100 range, and it didn't get there by accident. Quotes have ripped 57% higher in just one month and nearly 48% over the past year. The rocket fuel behind it? Escalating geopolitical tensions in the Middle East, especially the flare-up with Iran and those nerve-wracking threats to energy flows through the Strait of Hormuz. As a major fuel exporter, Canada is reaping huge benefits—soaring oil prices give the loonie wings, thus putting pressure on USDCAD. Even if oil takes a breather in the coming days, the long-term uptrend will remain firmly intact—and such a tailwind won't be lost anytime soon.

2. Canadian inflation is cooling, not crashing. 

All eyes are glued to March 16, when February's Consumer Price Index (CPI) numbers are to be released. The consensus is that annual inflation will ease to 2.3% (unchanged from January), with month-over-month (MoM) readings rising 0.7%. This is cozying right up to the Bank of Canada's (BoC) sacred 2% target. Throw in softer core measures (which have dipped to some of the lowest levels in recent years), and you've got a clear picture of easing price pressures across the economy. In other words, the regulator can stay in its comfy chair. No rate hikes on the horizon. No hawkish surprises. Just a steady loonie keeping the pair pinned down.

3. The Fed wildcard is at play.

Then there is the Federal Reserve meeting on March 18. No one expects a rate shift—the status quo is the name of the game. However, the real drama will lie in the tone and updated economic forecasts. If the central bank strikes a hawkish chord and cites inflation risks from the oil shock, the greenback could strengthen, temporarily propping up USDCAD. But here is the catch: although hawks have their say, the combined weight of lofty fuel prices and tame Canadian CPI should keep any upside in check. The bigger picture still points lower. 

The overall recommendation:

— Sell USDCAD at the current price, targeting 1.35 within two months.

— To mitigate risk in case the market moves against us, place a Stop Loss order just above the resistance zone at 1.38.