USD/CAD at 11-year highs, but bulls may still tap the brakes this week

After Thursday’s bombshell drop in the greenback, US dollar bulls are starting to peek their eyes back out of their bunkers to see that the terrain is much the same as it was before; most importantly, the Federal Reserve is still very likely to raise interest rates next week, in sharp contrast to the easy (and growing easier) monetary policy across the rest of the developed world. As a result, the US dollar index has pared almost have of Thursday’s losses to trade back near the 99.00 level.

One of the big contributors to today’s rally in the dollar index has been USD/CAD, which is trading at a fresh 11-year high as we go to press. From a fundamental perspective, Canada’s economic data has been moving in the wrong direction, with Friday’s jobs report showing that the Great White North actually lost 35.7k jobs last month, driving the unemployment rate up to 7.1%, the highest rate since January 2014.

To add insult to injury, the price of oil, Canada’s most important export, continues to fall after OPEC refused to cut production in its meeting late last week. West Texas Intermediate (WTI) crude oil is edging below 39.00 as of writing, with bears pondering another test of August’s six-year lows around 38.00. As long as oil prices remain subdued, Canada’s economy (and by extension the loonie), will struggle to rally.

Technical view: USD/CAD

In contrast to the fundamental outlook, the technical picture for USD/CAD is somewhat mixed. The currency pair is trading at an 11-year high as we noted yesterday, but it has yet to definitively clear long-term Fibonacci resistance at 1.3465, which represents the 61.8% Fibonacci retracement of the entire 2002-2007 drop.

Likewise, although the RSI indicator has apparently broken out of its recent range is on the verge of reaching “overbought” territory once again, the MACD is comparatively lagging, with the indicator merely flat-lining over the last two weeks.

Before bulls can “back up the truck” and buy USD/CAD confidently, they’d like to see a confirmed break (and ideally weekly close) above the 1.3460-1.3500 zone. If seen, a move into the upper 1.30s would be the next logical development. On the other hand, another rejection in the mid-1.3400s would suggest more of the same rangebound trade in the lower-1.30s for the rest of the year.