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The US dollar pulled back slightly during the early part of the trading session on Wednesday as the market continues to be very noisy and choppy. With that being said, the USD/CAD market also is one that must deal with a certain amount of questions asked about the oil markets and the interest rate markets.
Why US Yields and Oil Prices Are Driving USD/CAD Right Now
Currently, we continue to see a lot of pressure in the interest rate markets as the yields in America continue to rise. That being said, the US dollar falling against the Canadian dollar could very well have something to do with the fact that oil just continues to climb with the noise in the Middle East. This is noise that I don’t think is going away anytime soon. This is about trying to find a way out of a situation that simply isn’t easy to get out of, as saving face is the most important factor for all of those who have the ability to do so.
Why USD/CAD Remains a Push‑and‑Pull, Headline‑Driven Market
Overall, the oil markets are driving a lot of things right now, not the least of which would be the fact that markets are having to price in the idea of potential energy shocks in the realm of inflation. Ultimately, this market continues to be very noisy and driven by headlines coming out of the Middle East. In other words, it is almost impossible to get a big position going in this pair at the moment. Sizing will have to be considered with any trade you take.
What USD/CAD Price Action Is Showing Between 1.40 and 1.4250
Looking at the charts, the 1.40 level is an area that has offered both support and resistance multiple times in the past, and it is also attracting the 50-day EMA. With that being said, it's very possible that the most recent bounce was an attempt to find a floor in the market. The market bouncing the way it has, of course, is a good sign, but one will have to pay some attention in this area as we are basically in the middle of the range that we had been in previously.
USD/CAD Price Chart
The 1.42 level seems to be offering a lot of resistance, and it is an area that we had plunged from. But if we could break above the 1.4250 level, that could open up a move to the 1.45 level, which is a continuation of the overall uptrend. At this point, I find it difficult to short this pair, but if I played in favor of oil, I would buy the Canadian dollar against others.
Alternative Scenario: Stronger Oil Leaves USD/CAD Range but Boosts the Loonie Elsewhere
The alternative scenario, of course, is that the situation in the Middle East continues to deteriorate, and if oil markets truly end up being as aggressive as they've been over the last couple of days for some time, then the Canadian dollar could be a beneficiary across the forex world. While I would not expect as much strength against the US dollar as it will see against other currencies, it most certainly is going to be an influence.
What USD/CAD Traders May Watch Next Inside This Range
This is a little bit of a push-and-pull type of situation as interest rates are a major driver, but at the same time, many traders just simply use the Loonie as a proxy for oil. Keep an eye on those headlines and keep an eye on the interest rates. It can give you a little bit of help in guiding which direction we go. As things stand right now, we are between two major support and resistance levels, simply floating around looking for our next catalyst.
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