The Canadian dollar rallied again during the trading session on Monday as we are now seeing the US dollar trade just below the 1.21 handle. That is a very negative sign, and I think it opens up the possibility of a move down to the big figure at 1.20 underneath. That is an area that has been important on the monthly charts, and it is likely that it will attract a lot of attention in general, perhaps offering support. However, if we were to break down below there, it would open up the “trapdoor” in this market that could have the pair dropping quite drastically.
To the upside, I think there is a significant amount of resistance near the 1.2250 level, and then again at the 1.24 handle. Remember, this pair does move quite significantly based upon the oil markets and how they behave. The Canadian dollar is used as a proxy by a lot of traders out there as a way to trade oil, so if oil recovers during the trading session, that will only add more fuel to the fire of the selloff.
If oil starts to sell off, though, then it is likely that this pair will rally, because the Canadian dollar will then be sold off. However, the one thing that you should keep in mind is that the Bank of Canada has recently stated that it was going to start tapering bond purchases, which is something that most central banks around the world cannot do, essentially tightening monetary policy. Because of this, it is worth watching the West Texas Intermediate Crude Oil market, and whether or not we can break above the recent selling off.
We are closing towards the bottom of the overall range during the trading session on Monday, so that does suggest that we are going to continue to go lower. However, if you are looking to short this market, you probably want to see some type of short-term bounce that shows signs of exhaustion. In fact, it is not until we break above the 50-day EMA that I would even remotely consider buying this pair, and even then, I would have to take a big look at what is going on from a fundamental standpoint, because in order for this pair to rally significantly, there would have to be a massive shift.
