USD/CAD fell hard on Tuesday as traders continue to buy the oil contracts. While the US economy continues to expand, the oil markets are being jolted by troubles in the Persian Gulf area between Iran and its neighbors. Because of the games being played, there is a fear of the Iranians closing the Strait of Hormuz, an area where 60% of the world’s oil flows through. However, these fears are unfounded, as the United States would declare this as an act of war, and the Iranians know this.
Possibly helping the pair on Tuesday is the fact that the “risk on” sentiment came back with it being the first real trading day of the year. (Optimism seems to reign supreme at the start of each new trading year.) However, not much has changed over the weekend to warrant all of this optimism as far as we can see.
The $103 level has been broken in the oil markets, and the next test will be $105. If that level gives way, the demand for the Canadian dollar will be tremendous. The pair fell to the 1.01 level for the session, but bounced slightly towards the end of the day. The volume could perhaps be a bit low as well, as the all-important Non-Farm Payroll numbers come out at the end of the week, and combined with the holidays just wrapping up, there are a lot of traders that might be missing at the moment.
A break below 0.99 would be the point where the possibility of bullish action overall in this pair would have to be rethought, but in the mean time – we still see far too many risks out there to get too far into the “risk on” trade. The US dollar will more than likely continue to be strong going forward, and this area we are approaching should start to offer solid support. We are looking for a bullish candle to buy this pair on, especially the closer we get to parity. If we get that candle, we would buy and aim for 1.03 or so. We still expect this pair to be choppy though, and will trade is as a short-term market only.