From a fundamental and technical perspective, the odds are skewed towards further gains in the currency pair. As economic data heads towards multi-decade lows, the greenback could continue to strengthen on safe haven plays. From a Canadian dollar perspective, oil prices have dropped 55 percent since the July peak, but the reaction in the Canadian dollar has been nominal. Economic data has been mixed but there is no question that the trajectory for growth is downwards. The merchandise trade balance is expected this week and I expect that and other data to be CAD bearish. There is no reason why the Canadian economy should be immune to the slowdown in growth.

Furthermore, there has been a VERY strong correlation between USD/CAD and the BAX (*Canada’s Bank Acceptance Futures). According to the following chart, the implied yield of the June BAX contract continues to fall - this suggests that the correction in USD/CAD should be temporary.



Technically, I also really like the way USD/CAD is trading. It is holding well above the first standard deviation Bollinger Band and the 50% Fibonacci retracement of rally that took the currency pair from 1.03 to 1.3020.

If USD/CAD manages to clear 1.20, there is no major resistance until 1.24 to 1.25.



Kathy Lien is Director of Currency Research at GFT, and runs KathyLien.com.