The Canadian dollar, also nicknamed the “loonie,” is often referred to as a commodity currency, since its price is very sensitive to value of oil, Canada’s largest export.
OIL ACTION
Yesterday, the price of oil ran into a brick a wall, which happens to stand around the psychological $100 level. The bullish rally in oil might have been expected, but may now be overextended.
READY FOR A PULLBACK?
Two reasons for a potential correction could be: 1) concerns about falling demand from the two largest economies, the U.S. and China; and 2) the recent 24% summer rally, spurred on by the belief that the Fed would come through on its efforts to provide further stimulus in the U.S. economy.
Last week’s confirmation of a third, although different, round of stimulus, may already be heavily priced into the U.S. dollar as well as the price of oil. As a result, some economists are expecting that this round of quantitative easing (QE3) not to have as severe a negative effect on the U.S. dollar.
THE CHART
The daily chart of the dollar/Canada (USD/CAD) has continued to show strong dollar bullishness this week. Despite three straight days of net bullish price action, the bearish trend, which began on June 4, remains valid though could be tested shortly.
If price continues to rally towards .9825, the 23.6% Fibonacci retracement of the recent bearish move, we will look for a possible resumption of the bearish trend. Price could re-target the .9650 level. However, if bullish momentum accelerates above .9850, a deeper bullish correction could target the .9943 area and eventually to parity.
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