USD/CAD - 25 Delta Risk Reversals drop, more losses ahead?

The sharp sell-off in the USD/CAD pair ran out of steam near 12672 (38.2% Fib R of July 2011 low - Jan 2016 high) in the overnight trade, allowing for a minor technical recovery to 1.2765 levels. 

The spot was last seen trading around 1.2740, which is the 23.6% Fib retracement of the Wednesday’s sell-off. One may argue that USD/CAD looks oversold on technical charts, but the 25 delta risk reversal has something else to say. 

Sell on the rise?

The technical correction could be met with fresh offers if we take into account the drop in the one month 25 delta risk reversal (from 0.162 on Tuesday to 0.025 on Wednesday). The one-week 25 delta risk reversal fell sharply from 0.60 to -0.37. 

The sharp decline represents increased demand for the downside protection (Put option), which goes well with the fact that BOC was way more hawkish than expected. 

USD/CAD Technical Levels

A break below 1.2672 (38.2% Fib R of Jul 2011 low - Jan 2016 high) would open doors for 1.2654 (June 2016 low). The next major support is lined up at the key psychological level of 1.25. On the higher side, resistance is seen at 1.2835 (5-DMA) and 1.2901 (10-DMA) and 1.30 (psychological level). Corrective rally could be short lived as the 5-DMA and 10-DMA are sloping downwards.