USD/CAD Forecast for the Week of December 26, 2011, Technical Analysis

The USD/CAD pair pulled back for the week and retraced the entire gains from the week previous. The pair has been very choppy, and will more than likely continue to be. The Canadian dollar is heavily influenced by the oil markets, and they have been fairly strong over the previous week as well. This causes demand for the Canadian dollar over time, and beat up the price of this pair as a result.

The 1.02 level is roughly where the week ended, and this area has been minor support several times over the last few months. This area is also the site of a massive doji from two weeks ago, and could set up for another bounce as the markets will more than likely be fairly quiet until January. However, with the headline risks out there involving Iran, Iraq, and North Korea, the oil markets could be subject to shocks in the near term.

The price of Light Sweet Crude is sitting just below the $100 mark at the time of writing, and this area should bringing in sellers all things being equal. This is another reason we think the 1.02 area will possibly hold up as support and give a boost to the pair. Either way, the major levels in this pair are parity and the 1.04 handle. Another sign for the bulls is the fact that the level was once 1.03, but this has gradually risen over the last few weeks, showing a grinding higher in this pair over time.

The breaking of 1.04 should have us running towards 1.05, 1.07, and 1.10 if the momentum can keep up. This pair has a history of very sudden moves, and this could happen much quicker than people suspect. In order to see a breakdown, we need to see the parity level give way, and it should also be noted that the parity level actually goes down to the 0.99 level as the area seems about 100 pips thick currently. The longer term in this pair will certainly be influenced by the oil markets, so watching those markets for clues will be essential.