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MENAFN- Daily Forex)
Another day, another rally in the greenback against the Canadian dollar, but it is worth noting that we are threatening a pretty serious resistance barrier in the form of the 1.45 level. When you look at the history of this pair, this is an area that's obviously been massive resistance. Now, the biggest problem that you will have as a retail trader is your inclination to start shorting right away.
While it could work out, there's no fundamental reason for that to happen. And it is worth noting that we had shot straight up in the air from about 1.34 to the 1.44 level. That is something this USD/CAD pair does tend to do. It'll do nothing for ages, and then suddenly bolt in one direction or the other, like 800, 1,000 pips.
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So, we're at the end of this run, and now you have to ask, what's next? Well, with the problems in the Canadian government, which are far beyond the scope of this article, it does make sense that the Canadian dollar continues to suffer. But there are some things graphically you can look at. The interest rate yield in both of these countries, with the blue being the US, the red being Canada, you can see are going in opposite directions. That isn't the be all end all but when you look at this, the Canadian 10 year yield is 3.2 and the US is 4.56.
So, by simply taking your Canadian dollars and putting them into US dollars, you're getting a better yield and you're getting the currency appreciation. This is one of the major things that are going on right now. This is a daily line chart, but you can really get granular if you want.
This is just one piece of the puzzle, but it's one that I know a lot of retail traders don't pay attention to. On short, short-term pullbacks, there are some areas that I would be watching. The most obvious one would be right around the 1.4350 region – a scenario that has been important a couple of times in the past, so why not again, right? And then after that, you're starting to look at 1.42. If the market pulls back to 1.42, I'm happy because I will be buying dollars again. The situation with the dollar is going to continue to see strength, not weakness, despite the fact that it may be a little overdone at the moment.
Fed funds futures rates predict that we get a quarter basis point, quarter percentage, 25 basis point rate cut in May out of the Fed. The next one is in December, which means we have a long way to go before the US dollar really takes it in the other direction. We will undoubtedly have some type of pullback in strength of the US dollar.
The question here is, will we get a daily close above 1.45, which would signify that the loony is going to continue to get beat down, or do we get a little bit of a pullback and find value? I prefer the latter of the two, but if we break above that 1.45 level, you have to acknowledge that.
EURUSD Chart by TradingView
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