The Canadian dollar is poised to have consecutive gains against the greenback as crude prices rebound and a report showed Canadian manufacturing sales surged 1.7% in December. The forecast was for only a gain of 0.8% and the initial reaction provided a boost for the Canadian dollar.
Both WTI and Brent crude continued to rise, with Brent crude prices rallying above the $60 handle for the first time this year. Since oil is Canada's largest export, a rebound with crude prices is postive for the Canadian economy and their currency.
The bullish bias for USD/CAD could be in jeopardy if oil prices continue to rally. Another 5% rally with oil price could support downward momentum to take the pair towards the 1.20 region. If the pullback breaks below the triangle shown above and the 38.2% Fibonacci retracement level of the 1.06 to 1.2797 rally, deeper support may come from the 50.0% Fibonacci level at 1.1730. It is unlikely that we will see prices drop below this area unless we hear concern from the Bank of Canada that the loonie is depreciating too quickly.
As investors unwind longterm bullish bets, we may see limited upside even if we do see a return of oil price weakness. Only a daily close above the 1.2800 level would open the door for further upside. Major resistance will come from the 1.30 zone.
The trade: Sell USD/CAD at 1.2460 with a stop loss at 1.2560 and a take profit at 1.2060. The Risk/Reward Ratio is 1: 4
Edward J. Moya
WorldWideMarkets Online Trading