The US dollar initially rallied a bit during the trading session on Monday to kick off the week, but as we have seen multiple times, it gave back the gains to fall. As we sit just above the 1.20 handle, one has to think that perhaps we are trying to build up the necessary momentum to chip away at this support. If we do get a daily close below the 1.20 handle, then I believe this pair will probably fall significantly.
It is obvious that we are struggling with this area to the downside, so this could be more or less a grinder as we are seeing in the crude oil market. If the crude oil market suddenly takes off, that might be reason enough for this pair to continue going lower. Furthermore, the Bank of Canada has already suggested that tapering its bond purchase program will be the way going forward, so as long as that is going to be the case it does make sense that the bond yield differential should favor Canada anyway.
When you look at it through the prism of both the commodities trade and the reopening situation, it makes sense that there will be demand for Canadian goods, and although it is very rarely focused on, the lumber situation will have been a major factor when it comes to demand for the Loonie. At this point, I look at rallies as potential selling opportunities, especially near the 1.22 level and the 1.24 level.
If we were to break down below the 1.20 handle, then it is possible that we will go to the 1.18 level, followed by the 1.15 handle. This obviously would be a huge commodity play as well as US dollar weakness, but at this point it looks very possible, as the US dollar has a lot of bearish pressure attached to it, and there is the Federal Reserve out there looking to flood the market with massive amounts of liquidity, thereby putting downward pressure on the greenback. At this point, unless we get some type of major “risk off event”, it is very unlikely that this pair will rally for any significant amount of time, even though we are at a crucial support region.
