USD/CAD Forecast: Continues to Rally

• The U.S. dollar extended gains above 1.41 against the Canadian dollar on Wednesday, supported by rate differentials and trade tensions.
• I expect pullbacks to attract buyers, with upside potential toward 1.4250 as U.S. strength continues to dominate.

The U.S. dollar continued its rally against the Canadian dollar during early trading on Wednesday, as we are now above the 1.41 level. Ultimately, short-term pullbacks are likely to appear, but those short-term pullbacks, more likely than not, will offer buying opportunities that people are willing to take advantage of. In fact, as long as the U.S. dollar can stay above 1.40 Canadian dollars, I think it makes a lot of sense that each dip will get bought into.

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Interest Rates

The interest rate differential between the United States and Canada, of course, still favors the United States, and I don't see that changing anytime soon. While the U.S. dollar fell to the 200-day EMA a while back, we bounced enough to form a bit of a hammer, and that hammer, of course, led the most recent leg higher. Ultimately, we had seen the Canadians cut rates but suggested that perhaps they weren't going to be cutting much more. But later that day, we saw the FOMC out of the United States cut rates and suggest that further rate cuts aren't necessarily a given at this point.

We've seen the U.S. dollar rally since then, and it really hasn't looked back. That makes a certain amount of sense considering that the interest rate differential favors the United States, and of course, these two countries are still in a trade spat that Canada desperately needs to end sooner or later. After all, 75% of all exports coming out of Canada end up in the United States. The two economies are so interconnected that it's almost impossible to disconnect them, at least not anytime soon.

Sooner or later, the tensions between Canada and the United States will really start to weigh on the Canadian dollar. At this point, I believe that we are going to go looking to the 1.4250 level above, where we had seen a lot of supply previously. Short-term pullbacks should continue to attract a lot of buying opportunities and those looking to find value.

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