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

usdcad.jpg

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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