USD/CAD Daily Outlook March 2, 2012

By: Christopher Lewis

USD/CAD is one of the most favored commodity trades for the average Forex trader. The Canadian dollar and its relationship to the behavior of oil markets is a well-known phenomenon, and one of the most reliable moves in the markets over time. The CAD will rise on the whole, and the Dollar will fall when oil prices rise.

The logic behind this makes complete sense if you think about it. For starters, the oil markets are priced in Dollars, so it makes sense the Dollar loses value as it takes more of them to buy that barrel of oil. Also, Canada sends over 80% of its oil to the US, so if there is high demand for oil, there will be Dollars flowing out of the US, and then into Canada. Granted, this correlation doesn’t have to be 100%, but in general it has worked in the past.

The recent action in oil has been very bullish. Brent has skyrocketed, and the NYMEX contracts have been very bullish as well. The thing about this is that the Brent market is moving much quicker recently, and this is because a lot of the oil Iran sends out is Brent. So is Libyan and Sudanese oil, all Brent. This has caused a bit of a supply shortage, and in the case of the Iranians, fears of shortages. On the other hand, there is a massive glut of oil at Cushing, Oklahoma currently, therefore meaning that Light Sweet Crude for delivery isn’t exactly hard to find.

This explains why the USD/CAD hasn’t melted down. Also, there is a bit of a bid for the Dollar from time to time as the safety trade. When you look at other petro currencies, you see that they have done much better than the Loonie, and this is in my opinion because of the two different oil markets and the differences in issues.

Support, support, support

The USD/CAD has fallen over the last few days, and certainly has a downward bias to it. However, there are minor and major support levels all the way down to the 0.97 level. The resistance above is at the 1.01 level. There are other resistance points, but that is the one that I need to see the pair close above on the daily chart to buy. As for shorting, if I had to take a position that would be the one I’d take. However, this pair looks like one that will grind more than anything else. There are cleaner oil plays out there currently, such as the USD/NOK, NOK/JPY, and USD/RUB.