The Canadian Dollar 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.
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 at 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 moves up to the current levels due to US economic worries. The target zone for the move is the 1.34-1.35 interval in the next two months. Short positions should be considered on the pair with a stop loss of around 1.403. Put options with a 1.38 strike and expiration dates in January or February also look attractive here.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
