The US dollar rallied significantly on Monday to break above the top of a shooting star candlestick from Friday. Because of this, it looks as if the market is trying to break out to the upside, perhaps reaching the 1.27 handle, maybe even the 1.29 handle. At this point, the market is in the process of bouncing around in a larger consolidation area.
That consolidation area is measured from 1.29 on the top and the 1.25 level on the bottom. Because of this, the market is likely to see a lot of back and forth, and we are approaching the middle of the overall area, but ultimately the CAD tends to run based on what is going on in the oil market. For what it is worth, the oil market has broken through a major uptrend line, although it has not completely collapsed. If we start to see an acceleration to the downside when it comes to crude oil, that should hammer the CAD.
The argument against oil is that there is a significant amount of demand destruction going on right now due to the fact that the world is very likely to go into a global recession. Recessions are absolutely horrible for the price of oil, as demand falls through the floor. If that truly is going to be the case, then the Canadian dollar will certainly pay the price. Furthermore, the Federal Reserve is very aggressive in its tightening cycle at the moment, and it certainly looks as if it is going to continue to be the case. In this scenario, is very likely that the USD/CAD pair will reach the 1.29 level above.
I do not necessarily know that we can break out of this overall range, but it is always possible, especially if there is going to be some type of major “risk-off event.” Nonetheless, this is a market that has found a lot of buying pressure underneath the 1.25 handle, and I think it is more likely that we go higher than lower over the next several weeks. In fact, it is really not until we break down below that massive hammer from last week that I would consider this market likely to break down. Currently, it does not look likely.
