The AUD/CAD currency pair remains one of the strongest trending pairs in the forex trading market. From its 2008 low of 0.7724, reached 2 February, to its high of 0.9912, reached 9 November, AUD/CAD sustained a bullish trend that gained 2188 pips, or 28%, in nine months.

However, since the peak of investor sentiment on 9 November, AUD/CAD has reversed, breaking and closing beneath its bullish trendline on 7 December. The currency pair is now trending down, as shown on the daily chart, below:

Note that, by the time the price action broke beneath the bullish trendline, the bearish one had already been set, tested, and respected. Following that break south, the price action took a serious dive before pulling up short, just shy of the MA-200, and retracting back to the downtrend line for a retest. It continues bouncing beneath the trendline, its overall course still down.

For clues to its future course, one is tempted to apply a Fibonacci retracement to the downtrend, as shown below:

The retraction back to the bearish trendline was a full 61.8% retracement, near the intersection with the downtrend line. The zero level, at which the retracement would be considered complete and the fall lower would begin, is at 0.9197, the low point of the decline reached 23 December. Support levels aligned beneath the zero level to serve as short-term targets include 0.9165, 0.9080, 0.8990, and 0.8925, as shown by the red lines on the detailed daily chart, below:

However, another possibility for the currency pair’s future course is a consolidating triangle, one defined by the bearish trendline and the MA-200, which will serve as support for the price action until it’s broken through. In this scenario, traders should look for future tests of both support and resistance, with range-trading possibilities, as the triangle narrows. Only a decisive break will signal the currency pair means business; although generally respectful of boundaries, AUD/CAD has been known to spike through support and resistance levels in false breaks, which could trigger an unprofitable trade.

Both of these possibilities indicate further depreciation for AUD against CAD, at least in the short term. For insights into the longer term, one must look to the fundamental causes of the 2008 uptrend in the first place.

One cause of that uptrend was the carry trade, based on the interest rate differential between the RBA (at the time, 3.5%) and BoC (0.25%). Although the uptrend has ended, that differential continues to widen, with the RBA in a tightening cycle and the BoC sticking to their pledge to leave rates unchanged for an extended period of time.

But in November traders began losing their optimism and their willingness to risk capital on the carry trade. They began to take profit and close their long AUD/CAD positions, reducing the upward pressure on the price action, which began to decline in response.

Concerns regarding the sustainability and strength of the recovery, as well as jitters over sovereign debt and financial stability, brought and end to this uptrend. Until those concerns ease, the uptrend is not likely to be reestablished.