The Canadian Dollar (CAD) has suffered the largest damages. It has since weakened for the third consecutive session against the US Dollar (USD). The currency dropped another 0.3%, a sign that the tide in markets has turned. The USD/CAD is now rallying back into the 1.4050 area. Highly bullish Loonie Analysts have warned that the Loonie could receive even more upward pressure, with the possibility of highs not seen for seven months against the USD.
The CAD is sinking at present. This decline occurs as the Canadian economy is highly dependent on fluctuations in the crude oil markets. With oil prices still very low, the Loonie is under intense strain, adding to the Loonie’s current free fall against the Greenback. As the health of the US economy remains a critical factor for the Canadian Dollar’s performance, investors are closely monitoring economic indicators and trends.
Current Market Dynamics
Recently the USD/CAD exchange rate has been sending clear bullish signals, most obviously seen in daily candlestick formations. After falling to the 1.3850 support level, recent price action shows bullish buying pressure. Bids are presently probing a resistance area of 1.4050 to 1.4100. These levels have historically limited moves higher since mid-August of this year.
A confirmed daily close above the 1.4050 area would indicate a likely bullish resumption toward retesting the 1.4300 region. Market analysts have been watching this resistance zone intently. It will be extremely important in determining whether the CAD can recover, or whether downward pressure will continue.
From a technical analysis standpoint, the 50-day Exponential Moving Average (EMA) is approaching a ‘golden cross’ above the 200-day EMA. This extremely bullish indicator could mean that a trend reversal is in store. For that to happen, ongoing perseverance of purchasing momentum will be required.
Oil Prices and Economic Factors
The Canadian economy is profoundly dependent on the economy-wide impact of petroleum exports. Accordingly, movements in oil prices have a major impact on the value of the CAD. As Canada’s largest export commodity, fluctuations in oil prices tend to have an immediate impact on the currency’s performance. Right now, unyielding low barrel prices are what’s preventing the Loonie’s recovery hope.
Taken together, oil prices and the CAD have an 85 percent positive correlation. When oil prices rise, increasing the demand for the Loonie, this appreciation happens automatically. When commodity prices remain depressed, CAD struggles to maintain its value against the world’s major currencies, in particular the USD. Now, more than ever, this is a striking reality.
Interest rates determined by the Bank of Canada (BoC) are the most influential factor on the loonie’s price action. Inflation rates and trade balance Inflation rate is another important factor affecting USD value. Investors read every alteration to the BoC’s interest rate decisions. These decisions not only directly impact their sentiment but the broader stability of our economy.
Implications for Investors
With the CAD under acute pressure from both domestic and external fronts, investors have to stay on their toes. The recent drop underscores both the volatility at play in today’s currency markets, as well as the complex interconnections that exist among various economic indicators. Understanding all of these different pieces will be key to making smart investment decisions.
Recent market developments have indicated an increasing demand for purchasing CAD in exchange for USD. External economic pressures, most notably the tides of oil prices and the health of the US economy, will play a big role in determining which way things go next.
Market participants should closely monitor developments within crude oil markets alongside economic indicators from both Canada and the United States. Such vigilance will be important as they learn to work in what will no doubt be a period of uncertainty and possible volatility in currency exchanges.