USDCAD: When Market Reaction Contradicts the Data

Traders sometimes brace for an economic report, only to see the data meet or beat expectations while the market reaction disappoints.

This scenario played out in the USDCAD after the US and Canadian jobs data released on Friday.

The two releases painted very different employment landscapes:

• US nonfarm payrolls rose by 162,000, comfortably above the 56,000 forecast. Earlier months saw upward revisions as well.

• Canadian employment declined by 41,700, versus a predicted increase of 15,100.

The initial response was logical. Robust US figures and weak Canadian numbers drove the US dollar up and the loonie down, pushing USDCAD sharply higher.

But the rally was short-lived. USDCAD then reversed course and almost wiped out the entire gain from the report.

When Price Action Contradicts Fundamentals

When the market behaves counter to expectations, fundamental traders frequently look for a fresh narrative to justify the move.

One argument could be that rising oil prices bolstered the Canadian dollar, given Canada's status as a major oil producer. But the US is also a significant oil producer, so that link no longer carries the same weight.

Others might contend that inflation, not employment, is the primary concern for central banks. While that can be true at times, the two are interconnected. A robust labor market can boost wages, consumer spending, and eventually inflation, while a weak one can do the opposite.

No matter what the price does, a fundamental rationale will eventually be crafted to explain it.

I prefer to first listen to what the market itself is communicating. The market reflects the aggregate judgment of buyers and sellers deciding whether a price rises or falls. Their moves frequently signal a shift in sentiment before the new fundamental story emerges.

Technicals Initially Aligned with Fundamentals

Right after Friday's data, USDCAD climbed and broke above several key technical thresholds:

• The 200-day moving average at 1.3835

• The 100-hour moving average, currently near 1.3842

• The 200-hour moving average, currently near 1.38569

Crossing above all three moving averages marked a significant bullish turn. The fundamentals and technicals were in agreement early on, and buyers held the upper hand.

Thus far, the outlook was encouraging.

The issue arose with what followed, or more precisely, what did not follow.

The price could not push above the 38.2% retracement of the drop from the late-July peak, which stood near 1.3882 and served as the next key upside objective.

Hitting a target is insufficient for traders; the price must also demonstrate it can surpass the level and draw more buying. When momentum halts at a well-defined resistance, it signals that buyers might be weaker than the initial move indicated.

What I Wrote Right After the Report

The 38.2% retracement presented the next barrier. That was where buyers had to show they could sustain their grip.

I also noted:

The rally in the USDCAD has also produced an important technical shift. The price has moved back above its 200-day moving average at 1.3836, followed by breaks above the 100-hour moving average at 1.3850 and the 200-hour moving average at 1.38587. Moving above all three levels increases the bullish bias and gives buyers greater control.

The next key target is the 38.2% retracement of the decline from the late-July high at 1.3882. A sustained break above that level would open the door toward 1.39079, followed by the 100-day moving average at 1.3919. The downward-sloping trend line is also moving closer to the 100-day moving average, increasing that area’s importance. Reaching that target was unlikely on Friday, but traders should always keep the “road ahead” in mind.

I also wrote:

For traders, identifying risk is just as important as identifying targets. The 200-day moving average at 1.3836 is now the key risk-defining level. Buyers would not want to see the price move back below—and stay below—that moving average. If it does, the breakout would begin to look like a failed move, and some of the post-employment-report buyers could turn back into sellers. As long as the price remains above that level, however, the buyers maintain the stronger technical hand.

That risk-defining level eventually proved more significant than the fundamental narrative.

How the Bullish Move Unraveled

After failing to surpass the 38.2% retracement, USDCAD started to turn down. It slipped back under the 200-hour moving average, then the 100-hour MA, and eventually back to the 200-day MA.

Each breakdown eroded the bullish technical setup. Buyers were steadily losing control.

The price traded in a narrow range near the 200-day MA into Friday's close and during the Asian-Pacific session. But the pair could not regain the 100-hour MA.

That failure to bounce was another cautionary sign. If buyers remained in charge, they should have been able to recapture that level.

When the price later hit a fresh low during the early European session, sellers seized control and drove the pair toward 1.3806. This also widened the gap from the 200-day MA at 1.3835.

The breakout following the employment data had failed.

What Now for USDCAD?

The 200-day moving average is still the key technical marker, but its function has shifted.

It initially served as support after the bullish breakout. Now that the price has fallen below it, the same MA turns into resistance. Sellers retain the upper hand as long as the price remains beneath that level.

To the downside, the next objective is the swing zone between 1.37655 and 1.37780. A drop below that area would strengthen the bearish inclination and turn attention to the August low at 1.37315.

Conversely, for buyers to regain the upper hand, they must first recapture the 200-day MA and then climb back above the 100-hour and 200-hour MAs. Without those breaks, any rallies are likely to draw selling.

The Lesson for Traders

The takeaway is not that fundamentals are irrelevant. They are important.

Rather, the lesson is that the market's response to news can be more significant than the news itself.

The US and Canadian jobs data provided a fundamental case for USDCAD to rise. The pair initially reacted as anticipated, but buyers failed to breach the next technical target. When the price subsequently dropped back under the moving averages that had marked the bullish breakout, the market delivered a different signal.

For traders seeking an advantage, defining risk and comprehending why a move succeeded or failed, price action and technical levels frequently reveal the story before the new fundamental narrative takes shape.

At times, fundamentals and technicals align. But when they diverge, trust the price message. In USDCAD, the price action and technical backdrop ultimately told a starkly different tale than the two employment reports.