The US dollar rallied again during the trading session on Friday, as the oil markets have finally started to show signs of cooling off a bit. Furthermore, and perhaps even more importantly, the US 10-year note continues to sell off dramatically, causing spikes to occur in the yield. In other words, it makes the US dollar a much more attractive currency to hold than many of the other ones around the world as it is not only a “safe haven”, but it also offers more yield.
When you look at the technical analysis, we are still very much in a downtrend when it comes to the USD/CAD pair. This makes sense, because the crude oil markets had been going straight up in the air for a while, and that almost always makes the Canadian dollar go higher as Canada is such a major exporter of crude. However, the United States is also a major exporter of crude oil, so the correlation may not be as tight as it once was.
So, as I said, we are in a major downtrend, and we also have the 50-day EMA sitting right at the downtrend line in order to reinforce it. In other words, I think there are plenty of sellers sitting above to try to stop the appreciation of the greenback. Whether or not they are successful will probably have a lot to do with the 10-year note, and any interest rate differential between the two economies. Furthermore, it is probably worth noting that the most recent bounce has been from the 1.25 handle, an area that is crucial support on the monthly chart. In that vein, I believe that we are trying to determine the next major move in this currency pair, which probably has very little to do with the Canadian economy itself, and more to do with the price of oil and interest rate differential.
Currently, the whole world is focusing on the “reflation trade” and the huge peak in demand that we should see coming soon for things like energy and goods/services. The thinking is that if oil is in more demand, then it should continue to strengthen the Canadian dollar. I believe the next day or two will be crucial in determining what happens next so therefore I am still observing.