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Vladimir Zernov
USD/CAD

Weak Oil Continues To Put Pressure On The Canadian Dollar

USD/CAD continues its attempts to settle above 1.4500 and maintain the upside trend despite the broad-based weakness in the U.S. dollar. The U.S Dollar Index has left the 103 – 104 area and is currently located near the 102 level due to risk-on sentiment in most markets.

The expectations of a massive U.S. coronavirus aid package together with the previously announced unlimited quantitative easing ensure the flow of funds into riskier assets and lead to U.S. dollar weakness.

However, the Canadian dollar is heavily dependent on oil price dynamics, and oil fails to gain ground due to concerns about future oil demand.

Today, the markets had a chance to evaluate U.S. Flash PMI and New Home Sales numbers. The Manufacturing PMI Flash came at 49.2, just below the previous reading at 50.7.

However, the Services PMI Flash was down to 39.1 from the previous reading of 49.4, highlighting the blow to the services sector dealt by virus containment measures.

New Home Sales were also not inspiring, showing a 4.4% contraction. In general, investors and traders will have to get used to disappointing data since it is unlikely that any improvements will be reported in the following few weeks.

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Technical Analysis

USD/CAD continues to receive strong support at the 1.4330 level. Currently, the pair has settled in the 1.4330 – 1.4530 range despite the broad-based weakness of the U.S. dollar.

In this situation, traders will have to watch oil prices closely since a major move in any direction could quickly force USD/CAD to leave the current range.

In case USD/CAD breaks to the upside, the next resistance is still located in the 1.4610 – 1.4670 area. This is a very important level for the pair since it was previously visited back at the beginning of 2016 when oil prices were below $30 per barrel due to supply shock from the American shale oil.

At that time, the upside move was followed by a major correction which ultimately took USD/CAD to 1.2500. Thus, traders should expect increased resistance in this area since some players will surely initiate positions to bet on a simular move in 2020.

On the support side, the breach of the 1.4330 level will likely take the pair closer to the next support level at 1.4150.

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