By: Christopher Lewis
USD/CAD has been a difficult trade for a lot of people I know. The pair is stubborn to say the least, and often will turn around right when people would expect it to continue going in the same direction. This is mainly because of the interconnectivity between the two economies that are represented by the pair.
Far too many of my friends will think of this pair as an oil play. While this is true to a point, the real driver of this pair often is the economic health of the United States on the whole. The pair will fall, selling the Dollar off as the economy gets stronger. The main reason is that the Canadians send a large majority of their natural resources south of the border, and not just oil. So while the oil markets can move with this pair, to assume that other markets like lumber, (US housing) gold, (US inflation) and minerals (industry) as well don’t have a say in the direction of this pair is a bit simplistic.
Think of it this way: If your biggest customer is doing well, so are you. If they aren’t, you have trouble. This is the essence of this pair in regards to Canadian strength or weakness. If you want a more “pure” oil play, trade the Norwegian Krone or Russian Ruble.
0.99 And Parity
The 0.99 level managed to cause a bounce in the pair on Wednesday. This area continues to hold as support, and the fact that the oil inventory number came out higher than expected gave this pair enough of a reason to lift and bounce from the level again.
The area looks as if consolidation could be the future as well. True, the Tuesday candle was brutal, but the fact that there was absolutely no follow through concerns me from a bearish stance. The fact is that there are a lot of bad things that could happen – all of which would push money into the US Treasury markets and therefore the US dollar. I am buying a small position to play for continuation of consolidation. I expect the parity level to be as high as we can go in this pair at the moment.
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A bad Spanish bond auction in Europe could change this as fear would overcome the markets, but only in an extreme case. This would more than likely send the Dollar much higher.