The Canadian Dollar Powers Upward as the Oil Price Catches a Bid

Posted Thursday, December 8, 2016 by
Eric Furstenberg • 3 min read

The Canadian dollar continued to push back the US dollar on Thursday as the oil price managed to push higher again after three negative days. The US dollar traded higher against all the other major currencies, but the vigor of the Canadian dollar was just more than the Buck could handle.


USD/CAD 4-Hour Chart


It is not difficult to see that the Canadian dollar is currently very, very strong.


Notice how the price action frequently retraced to the 20-exponential moving average on this 4-hour chart. These were excellent levels to sell the pair at.


The bias for this pair remains negative on the smaller timeframes like the hourly and 4-hour charts. I don’t feel comfortable with entering long-term short trades on this pair at the moment. Although the setup on the daily chart also seems to be bearish, we need to remember that the current market price is above the 200-day moving average.


Something else to keep in mind is that the pair has pulled back to a level of former resistance which could maybe act as new support in the near future. Look at this daily chart:


USD/CAD Daily Chart


Although this pair is trading at very important levels, it doesn’t necessarily mean that it’s time to buy into it and wait for it to reverse. The last couple of weeks’ bullish formation has taken quite a blow in the last couple of trading days. Perhaps this correction will take us much lower than I originally thought. If we take a look at a daily chart of the USD/CAD with the slow stochastics oscillator placed on it, the bearish momentum becomes even more visible.


USD/CAD Daily Chart


If you look at the slow stochastics indicator at the bottom of the screen, you’ll notice the strong downward slope, and the push into oversold. It would require a lot of resources for the buyers to restore some solid bullish momentum to this pair.


As you might have noticed, the pair has been trading below the 20-day exponential moving average for several days already. Something else that has probably raised the eyebrows of traders who held / are holding long positions, is the fact that the exchange rate has broken the sequence of higher swing highs and higher swing lows as it recently broke the swing low formed on the 9th of November. The following chart makes this visual:


USD/CAD Daily Chart


This is not something that the bulls would have liked to see. Of course, this doesn’t mean that we have a trend reversal on our hands. Perhaps this is just a very deep retracement. I reckon this decline could lose some steam as it approaches the 200-day moving average. Perhaps this moving average will be a lifebuoy to the bullish market players who still hold long exposure.


If the USD/CAD were to resume its uptrend, it could possibly take a good number of days to build a base from where it could launch an attack on the bears. If the pair found support soon, it could perhaps chop around in a ranging fashion for a few days before moving higher again. The other scenario would be that the pair broke the 200-day moving average and continued to move lower from there. The USD/CAD seems like a tricky pair to play at the moment, so be careful if you’re going to trade it. Don’t forget to watch the oil price, as it normally has a great influence on the Canadian dollar. A higher oil price favors a stronger Canadian dollar.


US Oil Daily Chart


Oil has traded up to a resistance zone which seems like a difficult hurdle to clear. I wouldn’t be surprised to see it consolidate over the next few days. Neither would I be surprised if it traded lower. I don’t think investors have much confidence in the OPEC members and non-members to really stick to their oil production cut agreement. Even if they do, the other oil producing countries which are not involved in the deal will produce as much as they can to take their cut of the ‘surplus’ market share.


Friday is a quiet day in terms of economic news. Perhaps the market will begin to turn their focus to the FED’s interest rate decision on Wednesday next week. This is undoubtedly the most anticipated news event of this month.


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