The Canadian dollar has been going strong in recent weeks. Even a solid jobs report from the U.S. couldn’t stop the upward trend in the CAD to USD exchange rate. The question now is this: will this trend continue for the loonie?
CAD-USD Just Broke Above a Critical Resistance Level
We are all too familiar with the downfall of the loonie last year. Back in May, one Canadian dollar could get you more than US$0.80. Fast-forward to January 2016 and the CAD-USD exchange rate dipped below US$0.70.
Now, the Canadian dollar is making a strong comeback. Since its low in January, the CAD/USD exchange rate has climbed more than nine percent. Moreover, during this surge, the loonie has broken above a critical resistance level.
I’m looking at Fibonacci retracements, which can be amazingly accurate in the foreign exchange market. They are based on several key Fibonacci ratios and can be used to identify key levels of support and resistance, especially after a major move.
Based on the swing high and the swing low, the 38.2% retracement level could be a major resistance level for the currency pair. Back in September, this level acted as a support for the CAD to USD exchange rate. But then the pair broke below it. Now, as the USD-CAD has started to climb back upward, the previously broken support could be a new resistance.
However, as it turns out, the strong momentum in the Canadian dollar seems unstoppable. During the week of February 29, the CAD/USD exchange rate went right past the resistance level and reached $0.7507 on Friday.
Note that the U.S. Bureau of Labor Statistics released a better-than-expected jobs report on Friday. The U.S. economy added 242,000 jobs in the month of February, significantly more than the 195,000 additions markets were expecting. Moreover, the unemployment rate held steady at a low 4.9%. (Source: “Employment Situation Summary,” Bureau of Labor Statistics, March 4, 2016.)
All you need to do is draw a trendline between two extreme points and divide the vertical distance by key Fibonacci ratios. Here’s what they look like for the Canadian dollar:
Chart courtesy of www.StockCharts.com
Also on Friday, Statistics Canada reported its trade balance for January 2016. While Canada’s trade deficit widened from $631 million in December to $655 million, it was better than what people were expecting—a $1.0-billion deficit. (Source: “Canadian International Merchandise Trade, January 2016,” Statistics Canada, March 4, 2016.)
The Bottom Line on the Canadian Dollar
At the end of the day, keep in mind that there are so many factors that could affect exchange rates and technical analysis alone is not going to cut it. However, given the momentum the Canadian dollar is carrying, there is a chance that the CAD to USD exchange rate could continue its upward trend.