- The US dollar continues to strengthen against the Canadian dollar, supported by interest rate differentials and weak oil prices.
- With solid support near 1.40 and a potential target at 1.4250, buying dips remains the preferred strategy.
The US dollar rallied again against the Canadian dollar on Tuesday as we continue to see a lot of noisy but positive behavior. This makes quite a bit of sense considering that the interest rate differential favors the US dollar, and the Canadian dollar itself has been getting hammered for a while. All things being equal, this is a market that, if we do get short-term pullbacks—which will happen from time to time, makes sense to be a buyer of this currency pair, as the interest rate differential pays you at the end of every day.
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The 1.40 Level Matters
The 1.40 level underneath is a large, round, psychologically significant figure and an area that a lot of people will be watching. If we were to break down below there, the 50-day EMA is sitting to offer support. The market could eventually go looking at the 1.4250 level, which is an area that has been important previously and then rolled over into a massive amount of supply. Because of this, I expect the 1.4250 level to offer a lot of interest as a target as well as a ceiling.
When you look at the longer-term trajectory of this pair, you can make an argument that we just broke out of some type of ugly inverted head and shoulders, which measures for a move to that 1.4250 level as well. In other words, this is a market that I think is going to make that move given enough time, especially considering that the United States and Canada are still in the midst of a bit of a trade war—and that, of course, favors the United States. Canada’s economy is about 8% of the US economy, and it’s actually smaller than Texas.
I think a lot of people miss that point. With that being the case, and with oil in the dumps, it makes sense that the Canadian dollar continues to weaken. I like buying dips in this pair, have for several months, and will continue to do so until something fundamentally changes.
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