3 Reasons Why the Canadian Dollar Could Rally

More Optimism on the Local Front

Not only are Canadians generally rather cheerful people, but now they also have a more optimistic outlook on the economy!

A survey released yesterday by the Bank of Canada showed that business managers are generally more enthusiastic than they were just three months ago. According to the survey, 58% of the respondents said that they expect sales to pick up over the next year. This was a nice reversal from last December, which indicated that the majority of managers were expecting sales to fall in 2012.

Moreover, the survey indicated that 46% of companies are expected to spend more on capital investment. This bodes well for the Canadian economy, as companies will only up their big purchases if they are confident that the economy is about to get on a roll.

Seeing as how fundamentals are playing a key role in driving the currency markets, economic improvement could provide a nice boost for the Canadian dollar.

Concerns About Oil

Over the past few months, oil prices have spiked higher, with WTI crude reaching as high as 110.00 per barrel on concerns in the Middle East.

If you remember, all the tension began when the U.S. government established an embargo on the importation of Iranian oil in a response to rumors that Iran was using its oil trade to help finance its nuclear power program. Since then, other powerhouses like China and Germany have been pushing to cut back on Iranian oil imports as well.

Naturally, the political tension and fears of cutting off a major supplier caused a spike in oil prices.

For now, Iranian officials have agreed to talk to leaders of other nations regarding its nuclear power program. If this doesn’t go well, it could worsen the situation, which could lead to another run in oil prices.

If you were paying attention during your undergraduate program at the School of Pipsology, you’d remember that the Canadian dollar and oil prices are highly correlated. If we do see oil go on another rally, don’t be surprised to see the Canadian dollar follow suit.

QE Speculation Hanging Over U.S. Economy

Will the Fed ease or won’t it? The markets have been speculating about QE3 in the U.S. for months now, and though the Fed turned down the volume on stimulus talks in its last FOMC meeting, it hasn’t completely killed the prospect of more easing. Just think about it: with the labor market still showing signs of weakness (as evidenced by the March NFP), how can you rule out QE3?

From Canada’s standpoint, another round of QE from the Fed could be good news for the economy. Remember, the U.S. is Canada’s largest trading partner. Another round of easing could provide additional liquidity and boost spending in the U.S., which in turn could have a positive spill-over effect on the Canadian economy.

USD/CADChart

Pull out your USD/CAD daily chart and you’ll notice a striking pattern. That’s right, the pair has been consolidating for over a month now! With its range becoming narrower and narrower, it has formed what seems to be a bearish pennant.

Combining fundamental and technical analysis, a solid case can be made for a break lower. After all, when pennants form after a steep downtrend, as what we saw from December to January, the tendency is for price to continue downwards after a bit of consolidation.

Then again, you can NEVER be sure of anything in the world of forex trading. Action on USD/CAD will probably still rely heavily on developments on the three factors stated above, so make sure to stay tuned and read up regularly!


  • Vikenoshi

    Thank you for all valuable information, too bad I think Fed will not give any QE if inflation stay around  2.5%~2.6%, and it looks QE already doing its job. Beside that, many news always said economy recovery, but for me is like a cake which already baked but we can’t eat it and we don’t know that cake is taste good or not, just personal opinion.