The US dollar rallied just a bit on Friday, but as you can see, the Canadian dollar still has a bit of strength attached to it. Furthermore, the market continues to see a lot of influence from the oil markets, as although they initially sold off during the trading session, the crude oil market recovered quite nicely, and it drives up the idea of owning Canadian dollars.
That being said, you should keep in mind that we had broken down rather significantly and now we are simply consolidating in order to digest all of those gains by the Canadian dollar over the last month or so. If we break down below the 1.23 handle, then it is likely that this pair will continue to go much lower, perhaps reaching towards the 1.22 handle, and then eventually the 1.20 level. This is the most likely of scenarios, but it is not necessarily guaranteed. We need to see momentum in the crude oil market to give us an idea as to whether or not the Canadian dollar can support this move. Furthermore, we need to pay close attention to the fact that the US dollar is a major driver of Forex markets around the world as well. Quite frankly, the US dollar is the main driver of what has been going on here, right along with oil.
Interest rates in America have been rising, but they have been in Canada as well. The Bank of Canada has suggested that monetary policy would be tightened sooner than originally thought, so the market has to readjust its pricing of the Canadian dollar. At this point, it looks very likely that we are going to continue to see extreme demand for energy, and that should continue to help the Canadians going forward. That being said, if we were to turn around and break above the 1.25 handle, it could change the complexion of the market as it would not only be the breaching of a major round figure, but it would also have the market breaking above the 50-day EMA, which in and of itself would attract a certain amount of attention. If we do rally from here, I think it is only a matter of time before we see players in the market start selling yet again.
