USD/CAD Falls Below 1.25 on Rebounding Oil, Weak Greenback

02/04/2015 9:00 am EST

Focus: CURRENCIES

Yohay Elam, of ForexCrunch.com, takes a technical look at the Canadian dollar, which was hit hard by the surprising rate cut by the BOC but is now enjoying a recovery, at least temporarily, though he still questions whether this is a change of direction or just a temporary move.

The Canadian dollar is enjoying a recovery: USD/CAD is dipping below the round number of 1.25, nearly 300 pips from the peak.

The rebound in the price of oil and the streak of weak data from the US defy the echoes from Australia, at least for now.

The Canadian dollar was hit hard by the surprising rate cut by the BOC. The ongoing falls sent USD/CAD to nearly 1.25, especially as a downwards revision of employment data in Canada and disappointing Canadian GDP hit the C$.

The fate has changed, at least temporarily. Oil prices rose from the bottom, especially after the number of rigs in the US dropped sharply. The fall in oil prices is beginning to self correct: lower prices lead to lower production, which leads to rising prices.

The RBA in Australia followed the BOC and also cut rates. The weakness in the Aussie was fueled in part by the BOC cut and accelerated with the move. However, this time the contagion was only limited to the kiwi and did not reach CAD.

The correlation between the Canadian dollar and oil is strong now.

There's also another side to the equation: the US Factory orders plunged and hit the USD hard, especially as they came after disappointing growth numbers, a shortfall in manufacturing PMI, and a general notion that a rate hike in the US is coming later rather than sooner.

USD/CAD hit a low of 1.2480 at the time of writing. Further support awaits at 1.2415. High resistance is at 1.2680.

Is this a change of direction or just a temporary move?

Update: in the meantime, the fall of the US dollar accelerates and USD/CAD is all the way down to 1.2435.

Some think the pair is on the road to 1.30.

Here is the chart:

chart
Click to Enlarge

By Yohay Elam, Founder, Writer, and Editor, ForexCrunch.com

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