The US dollar had rallied a bit during the trading session on Thursday to show signs of strength against the Canadian dollar, but on Friday has given back that bullish momentum to fall towards the 1.21 handle again. This is not a huge surprise, because we have been in such a negative trend for a while. Ultimately, this is a market that I think will try to reach the 1.20 handle again, but quite frankly I suspected that this market would rally a bit further than it did. The 1.22 level was the very minimum of where we could have gone before finding sellers, but quite frankly I prefer to see the 1.23 level tested, perhaps even the 1.24 level which was so important in the past.
As per usual, the Canadian dollar is highly sensitive to the oil market. Oil markets did recover quite a bit during the trading session on Friday, so it does make sense that the Canadian dollar rallied right along with it. Furthermore, it should be noted that the oil market looks as if it is coiling up to make a bigger move, so if it does break out then that could be a reason for the USD/CAD pair to break down below the 1.20 handle handily. Breaking down below that level could open up a move down to the 1.18 handle rather quickly.
It is worth noting that this is an area that has been important multiple times in the monthly chart, but the Federal Reserve is keeping its monetary policy extraordinarily loose for the foreseeable future, and as a result it should continue to weigh upon the US dollar in general. Furthermore, the Bank of Canada has stated that it is going to cut back on bond purchases, so that is the same as tightening monetary policy. With that being the case, the Canadian dollar has enjoyed quite a bit of strength. With all of that wind up in the same scenario, I do think that the Canadian dollar continues to show strength eventually, but if we break down below the 1.20 handle is very possible this market may find a little bit of support. If that happens, you may be looking at other pairs to start buying the Canadian dollar against other currencies such as the Japanese yen. Either way, the CAD is not something that I would be looking to short anytime soon.
