USD/CAD Analysis: Why is CAD under performing Oil?

OPEC deal pushed oil prices at both sides of the Atlantic higher by 8%. However, the Canadian dollar is trading sideways against the US dollar.

As of writing, the USD/CAD pair was trading flat around 1.3434, while the WTI Oil was up 8.4% at $49.10/barrel.

OPEC deal – short-term positive for Oil

Important – The agreement, also calls for a reduction of about 600,000 barrels a day by non-OPEC countries

OPEC nations currently produce about 33.7 million barrels of oil per day. Under the deal, they’ll bring that down to 32.5 million barrels per day.

The boost from the OPEC deal could be short lived because it assumes the non-OPEC supply would drop as well. So in a way it is conditional, which also means OPEC could give up on the output cut deal if the non-OPEC supply continues to rise.

The irony is that non-OPEC supply could indeed rise in response to higher prices. The indication could come through from the rise in the Baker Hughes oil rig data released in the US every Friday.

However, the fact that the boost to oil prices could be short lived isn’t behind CAD’s under performance.

Oil rally makes way for faster Fed rate hikes

Fed and other major central banks are obsessed with pushing the inflation higher. Remember that back in late 2014, it was the sell-off in oil prices and the resulting drop in the inflation expectations and the financial market stability that forced the major central banks to ease aggressively.

OPEC deal today has raised the odds of a more sustained rally in oil, which would bode well for the inflation expectations across the advanced world. Trump Bump has already pushed up inflation expectations to two-year high in US and triggered speculation of a steeper fed rate hike path.

The OPEC deal adds further credence to the argument that the Fed would raise rates faster than expected in 2017.

… And that is keeping the USD/CAD pair flat despite the oil rally.

When to buy the Canadian Dollar?

The best time to go long on CAD is when USD/JPY and EUR/USD signal the US dollar is topping out. Once the rising inflation expectations in the US are fully priced-in, CAD would begin pricing-in the oil rally.

As of now, the best CAD trade would be shorting EUR/CAD, GBP/CAD, and Buy CAD/JPY.

USD/CAD – Stuck at 61.8% Fibo

Monthly chart

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Chart Source: Netstation (www.netdania.com)

On the above chart, we see the pair is having a tough time breaching 1.3463 (61.8% of 2002 high to Nov 2007 low).

As of now, the pair is trading around 1.3417, which means the odds of a day end close (month end close) below 1.3463 are high.

A close around 1.3417 would confirm a Doji candle at the critical resistance of 1.3463.

That would be bad news for CAD bulls at least in the short-run. On the downside, strong support levels at 1.3280 and 1.32.

 

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USD/CAD Forecast: Sell the Bullish OPEC soundbytes

“Fun Unlimited” is the word I would use to describe the pre-OPEC market environment. Let us revise the oil price action since early Asia and you would understand why I say it is “fun unlimited”.

Saudi’s said over the weekend the oil output cut deal may not be required. In response oil prices fell at least 1.6%. When I woke up early morning at 5 AM IST, the first thing I did was check oil prices.

By early Europe, Oil had recovered losses and was trading moderately positive. All the effort was in vain as prices fell 1% again by mid-Europe only to stage a recovery again.

News hit the wires in the US session that Saudi Arabia, the group’s de facto leader, has offered to cut 4.5 per cent from its production levels of about 10.5m b/d in October. However…. Yes, there is always that ‘however’ thing with Saudi and OPEC. However, Saudi insists that Iran and Iraq accept large cuts.

Oil prices currently trade at least 2.5% higher on both sides of the Atlantic. Don’t be surprised to see oil down 4% tomorrow if we get a bearish soundbite.

Being very very flexible is the trick to trade OPEC meeting

The very idea of trading the OPEC event demands extreme flexibility. One needs to switch trades as per the quality of soundbites – Bearish/Bullish. If you are not comfortable trading oil, you may consider the USD/CAD pair.

Let us look at the daily chart of the USD/CAD pair

Daily chart

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I see following patterns on the daily chart –

Sideways channel (green)

Rising channel (red)

Small symmetrical (black)

As of now the pair has breached the symmetrical triangle on the downside. Earlier this month, we also saw a failure to capitalize on the bullish break from the rising channel.

In case, the daily close is inside the sideways channel (green), the odds of a further retreat to 1.3250 would rise.

On the higher side, I would be comfortable opening long positions only if I see  a break above the Friday’s high of 1.3535.

However, as I said earlier, play the OPEC soundbites!

 

 

USD/CAD Forecast: Gathering steam for a fresh rally

The two-day decline in the Canadian dollar appears to have come to an end as the USD/CAD pair has recovered from the session low of 1.3377 to trade with marginal gains around 1.3432 levels.

Oil drop overshadows strong Canadian retail sales data

The official data released in Canada showed consumer spending as represented by the retail sales number picked up in September on demand for new cars. Auto purchases rose for the first time in three months.

Retail sales climbed 0.6% in September, matching estimates and higher than the previous month’s print of 0.1%. Core retail sales, excluding automobiles, were unchanged in September, after a 0.2% gain in the preceding month.

The month-on-month uptick in the retail sales failed to boost the demand for the Canadian dollar… as oil prices dropped on both sides of the Atlantic on reports that Iran and Iraq are unlikely to commit 100% in the OPEC output deal.

Moreover, the USD/CAD pair remains at the mercy of the oil price action and the Trump Trade at least for another week.

Technicals – Bulls eye daily close above 10-DMA

Daily chart

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Chart source: www.Netdania.com

  • Despite the two-day sell-off following multiple failures near 1.3560-1.3580 levels, the rebound from the channel support followed by a move back inside the rising channel suggests the bulls are gathering steam and could make their presence felt in a strong way if the prices end the day above the 10-DMA seen today at 1.3469.
  • A daily close above 10-DMA would open doors for a re-test of 1.3560-1.3580.
  • On the lower side, only a daily close back inside the sideways channel would add credence to the multiple failures around 1.3560-1.3580 and would shift risk in favor of a fresh sell-off to 1.3282 (100-DMA).