USD/CAD Will Test 1.40 Again

USD/CAD Will Test 1.40 Again

One of the best performing currencies this year is USD/CAD, which climbed more than 15% to a 12 year high. We have not seen the Canadian dollar this cheap since 2004 and there’s no doubt that its weakness reflects the underperformance of Canada’s economy. The biggest problem for Canada has and will continue to be oil. The price of oil is down 30% in the last 12 months and 60% in the last 18 months. Since economic data is released with a lag, we will continue to see the aftermath of lower oil prices in early 2016. The market is only pricing in a 25% probability of easing by March but we believe that the odds will grow as the year progresses. With many analysts calling for WTI crude to drop to as low as $20 a barrel in 2016, USD/CAD will not only test but also break 1.40 in the coming year. Oil supply and demand remain major problems for Canada’s largest industry and with no respite in sight, we expect the Bank of Canada to lower interest rates again on the back of weaker data.

Taking a look at the daily chart, USD/CAD is already attempting to rise above the first standard deviation Bollinger Band. Any dip towards 1.38 should be seen as a buying opportunity. We need to turn to the monthly chart to find resistance for USD/CAD. Right now the 12 year high of 1.40 is the most important resistance level. When this level is broken, the next important level will be 1.43, a level the currency pair broke down from in 2003, found support in 2000 and resistance at in 1995.

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