I think all you need is people running back into the bond market, or some type of shock to risk appetite.
The US dollar got hit rather hard across the board during the trading session on Wednesday, so it should not come as a huge surprise to see that the market turned around to break below the 200-day moving average. At this point though, the market is still very much in the previous resistance area, suggesting that there could be a bit of support building up in this general vicinity. If that is going to be the case, this could be a launching pad for longer-term traders looking to take advantage of the fact that we had recently broken above a rather significant set of barriers.
It is also worth noting that crude oil rallied quite extensively during the session, but still looks a little threatened due to the fact that you do not typically have days where crude oil drops 8% without some type of follow-through. Ultimately, this was a day of “risk on sentiment”, and that may have been a big driver for both the Canadian dollar and the crude oil market. After all, the inventory numbers in the United States disappointed during the previous session, so you would expect the crude oil price to fall, not to turn around and rally.
There is a lot of noise out there when it comes to the crude oil markets and Delta variant issues. It is all about supply and demand, and the Canadian dollar is used as a proxy for currency traders to play the oil market. Beyond that, the Canadian dollar is somewhat over-extended from a longer-term standpoint, but this most recent bounce has helped that situation quite significantly. It is worth noting that the 1.20 level is significant support on longer-term charts, so that may be part of what is going on here, but I also recognize that the 1.25 level just below the current candlestick could come in and support the greenback as well. At this point, I think all you need is people running back into the bond market, or some type of shock to risk appetite. Crude oil does not look very stable right now, so it could also come from that area as well. If we break down below the 50-day EMA, then it is likely we will continue to go lower and try to get down to the 1.20 handle again.