The US dollar has had a nice rally against several currencies over the last week as you know, in this article I am looking specifically against the Canadian dollar. The Canadian dollar is looking very vulnerable at this point, and for multiple reasons. Initially, I will look at a few external factors to the currency markets that will be felt.
Coronavirus figures continue to be a major influence on all things related to finance. This is of course no different in FX markets as it is in other places. In Ontario, arguably one of Canada’s most important provinces, the new cases have been rising since July, despite closing the border with the US. In July, Canada was adding roughly 175 cases a day, but in the last few weeks are closer to 1700 a day. This is obviously going to be something to think about and brings out the specter of a potential extension of lockdown measures, which of course will hurt the Canadian economy.
If you have been trading the FX markets for any length of time at all, you know the highly correlated movement between the crude oil markets and the Canadian dollar. After all, crude oil is one of Canada’s biggest exports, so a lot of FX traders will use the Loonie as a proxy for that market. However, we have recently seen the oil markets look a bit stagnant at best, and weak at worst. This will continue to weigh upon the Canadian dollar, and furthermore, there is a significant lack of demand out there for energy. Unless economic activity picks up, this will continue to be the overall thing to watch. Another sign of potential trouble for oil is that China is losing demand for it as well. Not a good look. Further oil weakness is expressed in the Canadian GDP figures, which went from -0.9% in spring to -13% in July. Yes, the GDP figures will certainly be better this time around, but still looks likely to be less than impressive.
The technical analysis for this pair is compelling. The market had recently broken above a longer-term downward trend line, and now has broken above the 50 day EMA. The 200 day EMA is just above, sitting at the 1.3450 level. This area being broken to the upside will move than likely send in fresh money, perhaps opening the door to the 1.36 level. After that, we could be looking at the 1.38 handle. To the downside, the 1.32 level looks likely to be supportive.