A Corrective Rally Seems Likely for CAD

A Corrective Rally Seems Likely for CAD
January 4, 2016

 
The Canadian Dollar (USD:CAD) has declined significantly over the past two years as the USD rallied from below parity to the current levels near 1.4. An accelerating technical downtrend coupled with unfavorable fundamentals fueled the fall in the currency. Also, the US Dollar showed broad strength in forex markets magnifying the effects on the pair.

The current technical picture shows strong resistance at the round number of 1.4 after a near-vertical uptrend in the pair in the last quarter of the year. Support is found near 1.37 in USD/CAD but the primary level to watch is the strong support/resistance zone around 1.34.

USDCAD Technical Analysis - 4th Jan 2016

Fundamentals are still negative for the CAD as the Canadian economy struggles on the brink of deflation and the Bank of Canada contemplates further easing of the monetary policy. BOC Governor Poloz hinted on possible negative interest rates in the country together with unconventional measures such as QE should deflationary forces persist. The Federal Reserve has already raised interest rates in December and further tightening is scheduled for 2016 in the USA. There are some concerns currently about the US economy and if GDP growth would slow down substantially it is likely that the FED would not just stop the rate hike cycle, but probably re-start its own QE program. This suggests a possible correction in the USD/CAD pair.

The CRB global commodities index is down almost 60% since the beginning of 2014 and the Canadian Dollar is highly correlated with that it as the country is a primary commodity exporter. Gold, on the other hand, is showing relative strength compared to the broad index and as it is a major export product of the country, strength in it might help a rebound in the currency. Energy prices are also crucial factors for the nation, so future trends in Oil and Natural Gas are likely to have a huge effect on the currency.

The overall picture is mixed, but a short to mid-term correction is likely after the strong momentum move up to the current levels and the due to US economic worries. The target zone for the move is the 1.34-1.35 interval in the next two month. Short positions should be considered on the pair with a stop loss around 1.403. Put options with a 1.38 strike and expiration dates in January or February also look attractive here.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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