The US dollar rallied a bit against the Canadian dollar on Tuesday, but we are still very much in consolidation. The 1.24 level seems to be a bit of resistance, so I think a certain amount of attention will be paid to this region. Beyond that, there seems to be a lot of noise near the 1.25 handle as well, so I think the upside is somewhat limited at this point. Nonetheless, the US dollar did strengthen during the day against multiple currencies, but keep in mind that the Canadian dollar has something that many of them do not have, and that is the backing of crude oil.
Because of this, I think we are looking at the market simply pulling back against the Canadian dollar in order to build up a bit of momentum. Regardless, if there is any sign of exhaustion, this is a market that will start to fall again. You could even make an argument for a bearish flag being formed, as we have been in such a negative move for a while. In fact, the “measured move” suggests that we could go looking towards the 1.20 handle. That is an area that has been important more than once in the past, and would bring a lot of psychological interest into the market. With that being the case, it is only a matter of time before we would see another attempt, especially if crude oil continues to show signs of strength, as it should. At this point in time, the market is likely to continue having a lot of demand for crude oil, and Canada by its very nature will be a beneficiary.
Furthermore, it should probably be noted that the US dollar got a little bit of a boost during the day, but mainly due to the fact that it is oversold at this point. I think that interest rates in the United States do look a little bit more appealing than some other countries, but at the end of the day we still have a lot of inflation out there, which should continue to drive the price of energy higher, so commodity currencies that are related to energy will certainly be a major beneficiary of this noisy behavior around the world.
