- Repricing of interest rates has seen US dollar surge
- CAD victim of drop in risk appetite and oil prices
- Breakout above key resistance means path to the upside
The USD/CAD has finally joined the other dollar pairs in breaking out this week. It looks like the bulls have finally got the confirmation they were waiting for before selling the CAD in favor of the USD. A hawkish Fed next week could send this pair towards and possibly beyond the 1.35 handle next.
This USD/CAD has been fairly stable due to Canada’s economy holding its own relatively better than some of the other regions in the world, while the sharp gains for crude oil earlier in the year also boosted the commodity dollar.
However, we have seen oil prices fall back quite sharply, joining many other commodities and indices, as fears about the health of the global economy intensify amid big rises in price levels around the world, and the accompanying monetary tightening that comes with it. The bigger-than-expected inflation data we saw earlier in the week from the US saw investors reprice interest rate expectations higher and this caused another upsurge in US dollar. From Canada, we had a weaker-than-expected jobs report last week, which together with a drop in oil prices and risk appetite, has weighed on the commodity dollar.
The USD/CAD momentarily fell below the key 1.30 handle, but after Tuesday’s stronger US inflation print, it has surged back higher and hasn’t looked back. It did hesitate a little bit when it approached former resistance in the 1.3200-1.3225 area on Wednesday. But by the next day, it broke through this resistance zone, leading to some more technical buying so far in today’s session.
Given everything that has happened and heading into a busy week for central bank meetings, the USD/CAD will be among the key dollar pairs to watch. Any dips back into that 1.3200-1.3225 is likely to be supported in light of this week’s sharp breakout. The path of least resistance will remain to the upside unless it plunges back below this area. In which case, the disappointed bulls will likely step aside, and the USD/CAD could drop back towards the point of origin of the breakout at around the 1.3000-1.3050 area.
But if the breakout holds, which is my base case scenario in light of the bullish break out and an overall rising trend, then I would expect a move towards 1.35 next. The bullish trend is plain to see, and there need not be any subjectivity involved. As well as the aforementioned breakout, you have both the short-term 21-day exponential and longer-term 200-day simple moving averages pointing higher, with price holding comfortably above both. This is a simple yet objective way of telling what the trend direction is.
The trend is your friend, so I would concentrate on buying dips back into that 1.3200-1.3235 range. Alternatively, if price does not pullback to this potential support area, I would look for consolidation patterns to form on the lower time frames
Disclaimer: The author currently does not own any of the instruments mentioned in this article.