One of the most dramatic moves we have seen in 2020 in the currency market, happened on the USDCAD pair. In fact, all CAD pairs experienced wild volatility, due to the volatile oil market.
The USDCAD is a major pair like no other. It reflects the exchange rate between the world’s reserve currency, the USD, and its Northern neighbor – the CAD. While the USD acts as a safe-haven in times of crisis , the CAD depends a lot on what happens with the price of oil.
More precisely, higher oil prices favor higher CAD, and lower oil prices lead to a decline in the CAD’s valuation.
2020 – Double Combo for USDCAD Bulls
The new year began with news out of China that a new virus, undefined at that time, was ravaging its cities and the economy. It was not the first time when Asia experienced a health crisis, so the world treated it just like previous viruses.
Before the World Health Organization (WHO) declared the virus a pandemic, the oil market crashed on the Russia-Saudi Arabia price war. They did not agree to cut production on already slowing demand, sending oil prices lower.
The CAD reacted immediately – it moved lower across the board, reflecting, once again, its direct correlation with the oil market. In terms of the USDCAD exchange rate, it translates into an indirect correlation – higher USDCAD on lower oil prices.
Moreover, by the time the coronavirus pandemic gained traction, the world was already in desperate need of USD. As such, the double combo explains why the USDCAD rose from 1.30 to 1.46 in less than three months – a staggering move by all metrics.
Such price swings always create ambiguity for technical analysis traders. If a consolidation follows, like it seems to be the case now, bulls look for continuation patterns like a bullish flag. This means that the market breaks the consolidation to the upside and the bullish trend resumes, sending the prices to at least a new higher high.
However flags are tricky patterns. First of all, there is no accurate estimation as to how long the consolidation takes place. Second, on such a big timeframe, the pattern becomes obvious and many market participants become aware of the bullish implications. Hence, as the principle of market efficiency tells us, such anomalies tend to disappear as traders act the opposite way.
One thing is for sure – the double combo hitting the USDCAD in 2020 was a move difficult to anticipate at the start of the trading year. Regardless of the new market direction, it shows how fundamental and technical analysis combine to interpret market moves.