Forex Market Outlook: Will the Canadian Dollar Reach Parity With the US Dollar?
Dear Trader,
This is probably a question that many traders are curious about. Will the USD/CAD reach 1.0000? That is, will the Canadian Dollar reach parity with the US Dollar? Given the strong Canadian Dollar rally over the past few months, we may be inclined to think that the CAD is a raging bull on a warpath that is probably not likely to run out of steam.
However, I don't think the Canadian Dollar will reach parity with the US Dollar, at least not in the short to medium term, and there are reasons why I would suggest so.
(1) The Canadian Dollar rally is way overdone, with net CAD Longs at an extreme level. This is the perfect condition for a reversal (i.e. there is not enough buying pressure in the market anymore to drive the CAD up)
(2) Oil prices have a pretty strong influence on the Canadian Dollar. One of the reasons why the Canadian Dollar rally was so strong is because the increasing oil prices were supporting it, among other reasons. Oil has gotten so expensive lately that consumers are looking to other economical solutions to commute (i.e. carpooling, public transit, hybrid vehicles, etc.) . The increase in the supply of oil will definitely have negative pressures on the price of oil; this in turn will remove one of the pillars that are vital to a further Canadian Dollar rally.
(3) The US Central Bank rate is currently at 5.25%, still 0.75% over the Canadian Central Bank rate. Just this interest rate differential alone makes US assets more attractive than Canadian assets. Unless the Fed signals a rate cut and the Bank of Canada signals aggressive rate hikes, the USD/CAD will not hit parity.
Going long the USD/CAD right now would have a very high risk/reward ratio, given that prices are floating right around the 1.0510 price level, which is roughly the 20 Day Simple Moving Average. This has acted as pretty strong support in multiple sessions, despite the dip below that figure on Wednesday. Even if the USD/CAD revisits the all-time low at 1.0340 it will most likely not follow-through below that. I would recommend buying half your long position now and setting a buy order near the all time low at 1.0340 for the second half of your position. Place a stop around 1.0275, which if triggered then would indicate that USD/CAD is aiming for parity; but as I stated before, this is HIGHLY UNLIKELY.
The past week has been pretty choppy given the risk aversion environment in the markets right now, but as long as you give your trades a little more room to run their course then you should be fine.
Stay tuned for more Forex insights and tips, let's make some money!
To your trading success,
DC
This is probably a question that many traders are curious about. Will the USD/CAD reach 1.0000? That is, will the Canadian Dollar reach parity with the US Dollar? Given the strong Canadian Dollar rally over the past few months, we may be inclined to think that the CAD is a raging bull on a warpath that is probably not likely to run out of steam.
However, I don't think the Canadian Dollar will reach parity with the US Dollar, at least not in the short to medium term, and there are reasons why I would suggest so.
(1) The Canadian Dollar rally is way overdone, with net CAD Longs at an extreme level. This is the perfect condition for a reversal (i.e. there is not enough buying pressure in the market anymore to drive the CAD up)
(2) Oil prices have a pretty strong influence on the Canadian Dollar. One of the reasons why the Canadian Dollar rally was so strong is because the increasing oil prices were supporting it, among other reasons. Oil has gotten so expensive lately that consumers are looking to other economical solutions to commute (i.e. carpooling, public transit, hybrid vehicles, etc.) . The increase in the supply of oil will definitely have negative pressures on the price of oil; this in turn will remove one of the pillars that are vital to a further Canadian Dollar rally.
(3) The US Central Bank rate is currently at 5.25%, still 0.75% over the Canadian Central Bank rate. Just this interest rate differential alone makes US assets more attractive than Canadian assets. Unless the Fed signals a rate cut and the Bank of Canada signals aggressive rate hikes, the USD/CAD will not hit parity.
Going long the USD/CAD right now would have a very high risk/reward ratio, given that prices are floating right around the 1.0510 price level, which is roughly the 20 Day Simple Moving Average. This has acted as pretty strong support in multiple sessions, despite the dip below that figure on Wednesday. Even if the USD/CAD revisits the all-time low at 1.0340 it will most likely not follow-through below that. I would recommend buying half your long position now and setting a buy order near the all time low at 1.0340 for the second half of your position. Place a stop around 1.0275, which if triggered then would indicate that USD/CAD is aiming for parity; but as I stated before, this is HIGHLY UNLIKELY.
The past week has been pretty choppy given the risk aversion environment in the markets right now, but as long as you give your trades a little more room to run their course then you should be fine.
Stay tuned for more Forex insights and tips, let's make some money!
To your trading success,
DC
posted by ForexDragon at 11:20 PM
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