The USD/CAD pair broke higher during the course of the session on Wednesday, as the Bank of Canada cut interest rates by 0.25%, to make them now at the 0.75% level. With that being the case, the US dollar of course went higher as the Canadian dollar struggles in the face of lower interest rates, and just as importantly – soft oil markets. Because of this, we believe that buying pullbacks will be the way to go going forward and that the 1.20 level of now nothing but a distant memory. In fact, that area could very well be the “floor” of this market as the US dollar should continue to strengthen overall.
While the interest-rate of course is higher in Canada than it is in the US, the truth is that the US economy is doing much better and it’s very likely that the interest-rate differential will close a bit going forward. The oil markets certainly are not helping either, and as a result it makes sense that this pair should continue to grind higher, probably heading to the 1.25 level next.
We now look at the area between the 1.18 handle and the 1.20 handle as a zone of support, so really it’s difficult to imagine this pair breaking down with any significance. We feel that the longer-term trend it should continue to favor the buyers, and with that being the case there’s no need to think about selling. Every time this pair dips, you have to look at it as perceived value in the US dollar, and essentially the US dollar going on sale. The Canadian dollar is a necessarily going to be the weakest currency out there, it’s just that it’s not going to do as well against the US dollar. We do not believe that wholesale Canadian dollar selling will continue, just against a handful of currencies. The US dollar of course is the favored currency around the world right now, so it makes sense that we continue to see bullish pressure in this market during the next several months.