USD/CAD at Critical Levels

USD/CAD at Critical Levels

USD/CAD at Critical Levels

On a fundamental basis, it has been extraordinarily difficult to trade USD/CAD. The correlation between CAD and oil appears to be wavering and even if it doesn’t fall apart completely, there’s been significant intraday volatility in oil leading to unusually large swings in the currency pair. The recent recovery in oil prices takes some of the pressure off the Canadian economy but given how much prices have fallen in recent months, the lingering effects of oil below $30 a barrel will still be felt. Consumer spending has been very weak and labor market conditions are expected to worsen as energy companies continue to tighten their belts. However the underlying performance of the Canadian economy appears to matter little to USD/CAD traders who are still watching oil. It is difficult to buy USD/CAD if oil is bouncing particularly as strongly as it has in the second half of this week. While oil has its own problems (inventories are at record highs), it is also ignoring fundamentals.

Technically USD/CAD is trading near very critical levels. The latest sell-off has taken the pair below the 100-day SMA for the first time since October. However for the time being, the 61.8% Fibonacci retracement of 2001 to 2007 at 1.3500 continues to hold. This is also a psychologically significant level, increasing the importance of a break. Should USD/CAD close below 1.3500, 1.3400 is the next level to watch and beyond that 1.3200. If USD/CAD bounces, the 100-day SMA at 1.3640 will be resistance.

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