- In my daily analysis of the USD/CAD pair, the market has been all over the place, and the first thing that I think about is that the market is hanging around the 1.40 level, a large, round, psychologically significant figure, and therefore I think it attracts a lot of attention.
- Keep in mind that the 1.40 level is likely to attract a lot of options traders, and therefore I think it makes a certain amount of sense that we would see volatility in this area.
Furthermore, you also have to keep in mind that we are somewhat overbought and had shot straight up in the air over the last several weeks. Because of this, the Canadian dollar has been weak against almost everything else, as the US dollar is the major measuring stick for the Loonie.
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Furthermore, you need to keep in mind that the 2 economies are heavily intertwined, so this does tend to be a choppy market overall. The bank of Canada recently had cut several times, so the interest rate differential started to favor the Federal Reserve quite drastically. However, the Federal Reserve has cut a couple of times as well, which helped to somewhat level the playing field. It was at this point that the bond market started raising rates for the Federal Reserve, and therefore we’ve got a situation where you still have a major interest rate differential, despite the fact that the 2 central banks have done everything they can to mirror each other.
Canadian Economy Depends on America
Keep in mind that the Canadian economy is highly sensitive to the US economy, and this of course is something that you need to keep in mind every time you trade this pair. Think of it this way: Canada sends a lot of commodities in the United States, and the United States of course is Canada’s biggest customer. It’s like owning a shop, your profits will be directly influenced by how the biggest customers are doing.
Because of this, if the US economy starts to tank, that actually makes the US dollar much stronger, despite the fact that most people would think that the dollar would be weaker in that situation. Because of this, this is a situation where I think you have to follow the trend, but we just don’t have a bit of momentum to start following to the upside.
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