Weakness in the equity and commodity markets spilled over to the USDCAD as this pair continued its two-day short-covering rally. Thecurrent rally taking place is a combination of both technical andfundamental factors.
Weakness in the equity and commodity markets spilled over to the USD CAD as this pair continued its two-day short-covering rally. The current rally taking place is a combination of both technical and fundamental factors.
Technically, this pair is following through to the upside following a closing price reversal bottom at 1.1474 on May 11. The chart pattern suggests a possible rally all the way back to 1.1991. The short-covering rally could be limited if stocks retrace to the upside or if crude oil continues to show strength. The key to the developing short-covering rally will be the establishment of higher bottom support at 1.1626.
Fundamentally, traders have to be concerned about possible developing weakness in the Canadian economy. So far the current rally in the Canadian Dollar has been triggered by higher equity markets and stronger crude oil. What traders may want to see is confirmation that the Canadian economy is bottoming. Last week, the Canadian jobs report showed that jobs were added, but traders may want to see improvements in other areas including production, housing and retail sales.
Remember this current rally was triggered by the Bank of Canada’s decision to refrain from applying quantitative easing until it was able to see if its interest rate cuts were having an impact on the economy. If reports show the economy is slowing then the BoC may use QE for stimulus. This would weaken the Canadian Dollar and send the USD CAD sharply higher.