Firm Crude, Gold Help Support Canadian Dollar – USD CAD June 27, 2011 |
The USD CAD posted a daily closing price reversal top after taking out the swing top at .9898 failed to attract aggressive buyers. The subsequent weak close put the market in a position to break uptrending Gann angle support at .9864, making it vulnerable to further downside pressure. Based on the last swing of .9700 to .9912, traders should look for a 2 to 3 day break back to .9806 to .9781.
The reversal top often gives weak longs an excuse to exit their positions early. The pattern may become major top, however, it make take 3 to 5 days to confirm it. Otherwise, all the reversal is suggesting is a temporary top. The main trend will remain up until the .9700 bottom is broken. In the meantime, the key upside target remains .9973 to 1.00.
Until Monday’s reversal top, the USD CAD’s upside momentum indicated that parity was the next likely resistance. At this level, Canadian exporters were expected to initiate fresh hedging positions which would have underpinned the Canadian Dollar, making the USD CAD vulnerable to a near-term break.
The inability to break crude oil and gold were also key reasons that prevented the USD CAD from rallying sharply higher. Early in the trading session, traders anticipated weakness in the commodity markets, but when that failed to happen, weak longs began to exit.
Later in the trading session, news that France was ready to give Greece concessions regarding its debt load, helped put in a bottom in the Euro, leading to a break in the Dollar. Light trader demand for higher risk assets, helped push the USD CAD lower, leading to the technical reversal top.
A possible shift in the fundamentals coupled with the reversal top makes the USD CAD vulnerable to a near-term correction. Firmer oil prices paired with the passing of the Greek austerity proposal later this week could drive the USD CAD lower as traders are likely to tank the U.S. Dollar on the news.
Two scenarios seem to be developing at this time. In the short-run, Monday’s closing price reversal top indicates the start of a possible correction to .9806 to .9781. This break may attract another round of buying especially if demand for crude oil and gold wanes. This buying could be triggered by a delay in the vote for Greek austerity or a failure to approve the entire proposal.
Should Greece pass the measure in a timely manner, then look for the U.S. Dollar to sell-off sharply. This should shift trader sentiment to “risk on” leading to a rise in crude oil, gold and the Canadian Dollar.
Longer-term, the entire strength of the USD CAD hinges upon whether the U.S. Dollar can continue to maintain its strength. Recent comments by the Federal Reserve suggest that no more stimuli will be applied to the economy. This could give the USD CAD a boost. This rally would likely be short-lived, however, because improvements in the U.S. economy mean that Canada’s economy is likely to prosper since it is the U.S.’s biggest trading partner. In addition, Canadian economic growth is likely to mean a Bank of Canada interest rate hike in the fall.
About the author: Forex Mansion Analyst - James Hyerczyk
 |
