A retest of the USD/CAD bounce is in store for the Canadian dollar this week

Canadian dollar could be in for a retest this week, as the USD/CAD pair will likely revisit the 1.32 level. The USD has been gaining strength due to positive effects from US fiscal policies and is now looking bullish previously after stability seemed to be returning to the Eurozone.

Natural gas at $2.45 per mmBTU threatens continental energy markets with a potential oversupply, but Canadian crude holds steady at $77 a barrel. All things considered, it’s safe to say that this week’s trading of USD/CAD will be less volatile than last week but still dependant on oil prices for direction. A retest of the 1.32 level later this week should prepare traders for a showdown below 1.30.

The USD/CAD has been gaining strength since the middle of last week, and has been looking bullish in the past few days following stability in the Eurozone. The situation is still very fluid as global energy markets are also showing us no clear direction… but so far things have been going well for crude oil and natural gas (and thus USD-denominated commodities) as they move higher, with oil above $77 a barrel in what is being called an “upturn in demand” despite US inventories climbing once again to exceed 4 million barrels per day.

What does the Canadian dollar have to do with this?

The Canadian dollar is a Petro currency because it is inextricably linked to oil prices. When crude is high, the CAD tends to be high; when crude is low, the CAD tends to go down. The same principle applies to natural gas prices. Just as gold and silver are other well-known examples of petrol currencies, the US dollar also has a strong relationship with oil (and thus with energy markets). Demand for US dollars increases when energy consumption goes up, but growth in energy consumption also increases demand for USD. Because these are petrol currencies, oil and gas most often act as the price “filler”, meaning they supplement each other, rather than drive each other.

What is this 1.32 USD/CAD level I keep hearing about?

Traders have been talking about a retest of the 1.32 level for a while now, and I have been covering this story since the start of summertime… or at least before the big US fiscal stimulus started to take effect. The 1.32 level is one of the key areas where we saw trading action last summer; it marks a key area for crude oil as well as for natural gas . Since late last year, I have been seeing retests of the 1.32 level infrequently and other times being completely ignored. This week may be one of those that finally have attention from traders.

Why does this week’s USD/CAD action matter?

The fact that this week’s play on the USD/CAD will be less volatile than last week means that if we see retesting of the 1.32 level, it will likely be followed by a test of the 1.30 level as well. So in other words, it may not be a simple bounce off the 1.32 level, but rather a test of the next key area of resistance for the Canadian dollar. The Canadian dollar seems to be getting weaker against the USD just as many other petrol currencies are getting stronger against the USD. The movement of BTC/USD and LTC/USD seems to be especially relevant here in terms of predicting what the USD/CAD will do.

As the USD/CAD bounces to test 1.30, a retest of the 1.32 level would indicate that the USD/CAD is ready to reclaim its old territory at 1.31. Remember, a retest of the 1.32 level by itself does not cause any kind of major movement; it simply shows that traders are expecting more volatility and thus more likely for the pair to head back in that direction. Any expectation for greater movement is good news for those looking to buy CAD and sell USD.