The US dollar rallied a bit during the trading session on Wednesday to reach towards the 50-day EMA against the Canadian dollar. This is interesting to watch, because we are testing a major downtrend line, and the 50-day EMA will attract a lot of attention in itself. Furthermore, the oil markets look very weak all of a sudden, as they continue to form shooting stars sitting on top of the uptrend line.
It will be interesting to see how this plays out, because we have a couple of different ways to look at this pair. The first one is that the Canadian dollar is highly sensitive to the price of crude oil, and the idea is that the crude oil market is going to be very strong as the economy reopens. However, when you look at this situation, oil did in fact see a bit of a draw down from the API numbers, but at the same time we also see gasoline and distillate inventories rising. This means that although crude oil inventories have fallen, the end user is not demanding more products.
It is worth noting that we are around the 1.26 level, because this is where we had seen the most recent break down. However, we have had a “higher low” recently, so if we break above the recent highs from the end of last month, I would be willing to get long. This is because the oil markets may be softening, but at the same time, we should be taking into account the fact that the US dollar has started to strengthen as of late, and interest rates in America are rising.
Beyond all of this, there is the huge differential between the United States and Canada right now, and that is the vaccination situation. Canada has had a slew of problems, much like the European Union, when it comes to vaccinating its population. On the other hand, the United States has been leading the rest of the world in vaccinations, so it makes sense that the US dollar may strengthen against the Loonie, at least from that standpoint. While Canada is a proxy for oil, it is also worth noting that shale producers in America have gotten back to work.
