USD/CAD Daily Outlook Feb. 7, 2012

By: Christopher Lewis

USD/CAD is a pair that will often give traders a lot of headaches. In order to understand why it acts so odd, you must understand the underlying fundamentals that the two currencies have pushing the pair around. The pair is very interconnected, and this as a result can cause the trader a lot of confusion, especially the newer ones.

Canada sends roughly 80% of its exports to the United States. Because of this, the pair simply cannot move too far in one direction for too long. (Long-term charts are different I am speaking of the intermediate-term at this point.) Think of it this way: If the United States finds itself going into recession, the Canadian dollar might gain for a while – but eventually the largest market for Canadian goods will stop buying as much. If your biggest customer is broke, you are in trouble. It is the same with countries as it is businesses.

The other major factor is found in the oil markets. Under normal circumstances, the price of oil rising will push the Canadian dollar higher in value. As Canada exports so much oil, it makes sense that the demand for Canadian dollars rises as the world comes to Canada to buy oil. The suppliers in Canada will need to be paid in those Canadian dollars, and since the US buys about 90% of the oil exported, this is particularly evident in the USD/CAD pair.

However, with the recent drama unfolding with Iran, the price of oil is being somewhat artificially propped up. The demand just isn’t there, but the oil traders are afraid to short oil as there could always be some kind of super spike if the tensions flare up. Because of this, the USD/CAD pair has been a grinder.

Ton of support

The Monday candle is a shooting star at the bottom of a downtrend. The fact that the market tried to break back above the parity level and failed is a bearish sign, and this would normally have me selling on a break below the bottom of the Monday range. However, there is also a ton of support going all the way down to the 0.9750 level and as such – I wouldn’t short the pair here. However, the downward pressure is going to keep me flat unless we close above the 1.01 resistance level on a daily close.

As a recap, I will short a sub-0.9750 close on the daily chart, or buy a post-1.01 level close. In the interim, the action will more than likely be far too choppy.