The sharp drop in the price of oil has weighed heavily on the oil-linked Canadian dollar today. The U.S. dollar/Canadian dollar (USD/CAD) currency pair has surged above 1.3200 handle and was heading toward 1.3280 resistance at the time of this writing. The USD/CAD’s rally has come despite an otherwise down day for the U.S. dollar, which has been hurt by soft data and anxiety ahead of President Donald Trump’s speech tonight.
But the Canadian dollar may weaken more if oil falls further or Donald Trump delivers more protectionist US government policy promises, detrimental to its neighbours. The biggest risk however is the Bank of Canada’s rate decision on Wednesday – any surprise rate cut or a dovish statement could send the CAD plunging.
But with a strong possibility we may see a volatile overnight session in the U.S. dollar, traders may be better off taking the greenback completely out of the equation and instead concentrate on a CAD cross, such as the EUR/CAD.
Now the EUR/CAD has broken its bearish trend line after forming an apparent bottom formation at around the 1.3800/20 area on Monday. Now near the 1.41 resistance level, we could see a sharp short squeeze rally if this level also breaks and force the sellers to abandon their positions. But with the EUR/CAD already significantly higher on the day, traders may wish to proceed with a bit of care now.
We are on the lookout for either (1) a pullback to 1.3960 support then a bounce or (2) a clean break above 1.4100 and then a rounded re-test. We think the EUR/CAD may be heading towards 1.4230 resistance in the coming days ahead of the prior swing high points at 1.4305 and 1.4360. But a potential daily close below 1.3920 support would invalidate our short-term bullish outlook.