First things first and the fundamental analysis is always on top of the list of drivers influencing currencies. This year began with a sharp spike in the risk appetite, especially in the equities field. US stock indices managed to recover a significant part of the previous quarter's losses, charting the best monthly performance in three decades. The Federal Reserve was completely dovish, lowering the market expectations for several interest rates hikes this year. The Fed Chairman Powell expressed readiness for the pause in the tightening cycle, underlining the need for support to the leading world's economy which started to show some signs of slowing down. Moreover, the Federal Open Market Committee even agreed to host a press conference after every single meeting and rate decision, which never happened many years. The main target is to calm down the nervous crowd of investors in the stock market. The US dollar lost its attractiveness for foreign investors, especially in the borrowing and fixed-income markets, due to the lack of growth in the interest rates differentials.
As a result, risk currencies started to climb together with high-yield assets. The US dollar index fell almost an impressive 2% against the volume weighted basket of six major currencies from the peak in December. The greenback's decline versus the Loonie was even more dramatic - 3.77% in January which is quite a sharp drop compared to many previous similar periods. The last time such a slide of USD/CAD has been noticed 18 months ago - in June 2017. By the way, that plunge lasted almost six months and affected the exchange rate to decline by more than 10%!
Now let's have a look at the situation from the Loonie's perspective. WTI Crude oil is always one of the key drivers for the Canadian export revenue and thus, the Canadian dollar. As long as the economy stays at the same level as the U.S., approximately, and there is nothing to expect from the Bank of Canada in the scope of tightening (or cutting?) the monetary policy, USD/CAD traditionally reflects the price action of oil with the inverse correlation. As you can see on any chart, WTI Crude did not retrace from the local top, hovering around $54 per barrel, staying near the highest levels in 4 months. There was some concern regarding the US oil inventories which started to increase recently, but the overall impact from the OPEC and Saudi Arabia decision to cut the output was not played out yet. The daily export volume of 1.5 million barrels is a significant part of the global consumption and the likelihood of WTI Crude price to climb further is still on the table.
Summarizing all above, we suggest that the recent dollar's rally is nothing but retracement and profit taking caused by low trading volume in the first week of February. Don't forget that the second largest international trade player - China - is on vacation for the New Lunar Year Celebration. Just imagine the spike of the trading volume on Monday when Chinese companies will get back to work, selling all of the dollars they have gotten from export operations. Another brick in the wall of that idea is that nothing changed this week in the fundamental side of things. Alright, Trump said several aggressive words in the House of Representatives. But he always does that. Stock indices keep rising slightly, the corporate earnings season did not bring many disappointments for equities investors. The Fed officials did not say anything hawkish yet.
Technically speaking, this week's bullish retracement already reached crucial depth to reverse back down. The daily chart below confirms that suggestion. First, the Ichimoku Cloud trend indicator is still bearish in the long-term perspective after the cross indicated here. Second, the price is approaching the bottom of the span's range which is strong technical resistance. It would not be cracked so easy as some bulls would have thought. Third, the 25-days simple moving average (green bold curve) comes here and USD/CAD used to stay below it since January 4.
The horizontal static resistance range represents a large volume of offers between 1.3288 and 1.3318. We will be monitoring that range very closely for intraday signals to enter the market, buying put options for USD/CAD in the medium term perspective. The worst-case scenario is to add more volume at the level of 1.3369, the highest daily price in two weeks. Aggressive traders could consider entering the market right by the current price, counting on a fast pullback toward 1.3200 support and beyond.