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Spotlight on USD CAD

Lower equity prices and crude oil have been helping to support the USD CAD, but a nearby resistance level is preventing this currency pair from rallying sharply higher. Although it is unclear fundamentally why this market is stalled from rallying up to its main upside target at 1.1922, it is clearly not attracting the buying power that it saw over the past month. One reason could be that the declines in the equity and crude oil markets have already been factored into the price. Another reason could be that the Bank of Canada is ready to take action to stimulate the economy. Whatever the reason, traders should watch the trading activity at 1.1748 for clues as to whether this market is getting ready to roll over to the downside.

On June 1 the USD CAD bottomed at 1.0783. This low finished a huge break that began on March 9 at 1.3062. The entire break coincided with the rally in equities and commodities and clearly demonstrated investor desire for higher yielding assets.

As equities rallied along with gold and crude oil, traders sold U.S. Dollars and bought Canadian Dollars. Another reason for the break in the USD CAD was that the Canadian economy seemed to be in a better position to recover than the U.S. economy. Certainly the Canadian banking system was not as devastated by the credit crunch as the U.S. system, and the Bank of Canada had not pumped that much stimulus into its economy.

As the U.S. Dollar was facing weakness because of the threat of inflation, the Canadian Dollar was not expected to face such a threat. In addition, the Bank of Canada only threatened quantitative easing while the Fed spent billions trying to keep interest rates down. Clearly the Canadian Dollar looked like the better of the two currencies.

Around June 1, the Bank of Canada began expressing concerns regarding the rapid rise in the Canadian Dollar. It felt that the rise in its currency would hurt the export market, which is a major component of the Canadian economy. At this time speculators began to lighten up positions in anticipation of action by the Bank of Canada. Some assumed that the BoC would intervene while others thought that the BoC would enact quantitative easing to try to boost the economy. Whatever the reason, speculators began liquidating and the Canadian Dollar began a short-term correction.

Recently the USD CAD rally began to slow down its rate of assent despite lower gold, crude oil and equity markets. This could be a sign that the selling was becoming greater than the buying.

Technically, this market is currently finding resistance at 50% of the April high at 1.2713 and the June low at 1.0783. If this market establishes resistance at this level of 1.1748, then traders should start to look for top pickers to begin to trigger the start of a short-term break which could take the USD CAD back to at least 1.1184 to 1.1089.

 

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