USD Continues to Remain Strong Against CAD as Crude Oil Prices Continue to Fall

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USD/CAD continues to trade below 1.3000 as oil rally offsets broad USD strength

The USD/CAD pair rose above the 1.3000 handle earlier in the day but struggled to stretch higher as surging crude oil prices helped the commodity-related loonie stay resilient against the greenback. As of writing, the pair was up 0.06% on the day at 1.2986.

Oil rises on US-Iran conflict

After the US airstrike killed a top Iranian commander in Baghdad on Friday, crude oil prices rose sharply as investors started to price the potential negative impact on the oil supply from the area. The barrel of West Texas Intermediate (WTI) advanced to its highest level in seven months at $64.05 before pulling back modestly. Ahead of the US Energy Information Administration’s weekly crude oil stock report, the WTI is trading at $63.30, adding 3.5% on a daily basis.

On the other hand, the greenback took advantage of the risk-off atmosphere with the US Dollar Index advancing beyond the 97 mark and turning positive for the week.

Before the Institue for Supply Management releases the Manufacturing PMI data, the index is up 0.22% on the day at 97. Later in the American session, the Federal Open Market Committee will publish the minutes of its December meeting as well. Previewing the minutes, “Fed officials have consistently been signalling that a policy change will require a material reassessment of the outlook, but the policy is not on a preset course,” noted TD Securities analysts.

Technical levels to watch for

USD/CAD

Overview
Today last price 1.2984
Today Daily Change -0.0004
Today Daily Change % -0.03
Today daily open 1.2988
Trends
Daily SMA20 1.3134
Daily SMA50 1.3184
Daily SMA100 1.3214
Daily SMA200 1.3257
Levels
Previous Daily High 1.301
Previous Daily Low 1.2968
Previous Weekly High 1.3272
Previous Weekly Low 1.3064
Previous Monthly High 1.3322
Previous Monthly Low 1.2951
Daily Fibonacci 38.2% 1.2994
Daily Fibonacci 61.8% 1.2984
Daily Pivot Point S1 1.2968
Daily Pivot Point S2 1.2948
Daily Pivot Point S3 1.2926
Daily Pivot Point R1 1.3008
Daily Pivot Point R2 1.303
Daily Pivot Point R3 1.305

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Pound to Canadian Dollar Outlook: CAD to Continue Oil Price Weakness with BoC Rate Decision Up Ahead

The Canadian dollar has fared badly over the course of the past few months as the fears surrounding the coronavirus remain heightened. As a direct result of the virus fears, the markets risk sentiment has plummeted, causing a downtrend in the demand for oil. The price of oil has continued to slump throughout the year as the market assumes a ‘risk-off’ mood. With little let-up in the diseases destructive path, and more nations notifying confirmed cases, the Canadian dollar looks to remain weak up ahead. Meanwhile, the Canadian central bank’s interest rate decision is set to be revealed later this week. The Bank of Canada (BoC) will meet to announce their interest rate decision for the month, the market is expecting the central bank to keep rates constant at 1.75%, but any dovishness will likely pick apart CAD.

Coronavirus keeps oil prices low, CAD slumps

The Canadian dollar has been a victim of the coronavirus since the first outbreak in Wuhan, China. Traders of CAD have had a tough time dealing with the decreased risk sentiment in the market which has allowed buyers with other currencies to ‘cash-in’ on the Canadian dollar’s weakness. With the lowered market risk sentiment, the price of oil has slumped on the back of a lowered demand from consumers. The virus has halted travel in some regions of the world with China being hit the worst. Economies across the world are anticipating knocks to their economic output figures in the months to come as the productivity of the affected nations is set to fall with restrictions on travel for both workers and freight as well as a reduced workforce due to the illness.

BoC interest rate decision up ahead, investors will scrutinise speech closely

This Thursday will mark the release of the Bank of Canada’s interest rate decision. The interest rate currently sits at 1.75%, and the market is not expecting a shift in this figure. This may surprise some due to CAD’s recent slump from the coronavirus. But the central bank will be looking to show resilience and see it through with hopes that the currency can recover in the long-term, despite the hit to CAD’s strength in the short-term. Investors will be keen to observe the speech given by the BoC officials who will likely refer to the threat posed by the coronavirus. Any signs of dovishness will see the Canadian Dollar fall further.

If you’d like to discuss these factors and how they could impact an upcoming currency transfer, feel free to get in touch with me, James Lovick, using the form below.

Crude Oil Price Triangle Breakdown Could Give Pause to USD/CAD

– Crude oil prices may be exiting a symmetrical triangle that has been forming since the end of May; a return to the trendline off the December 2020 and June 2020 lows is possible.

– The Canadian Dollar has been able to take advantage of the weak US Dollar, strong crude oil price environment over the past six weeks. A pullback in oil prices may have reason for USD/CAD losses to slow.

– Retail trader positioning suggests that crude oil prices may be on the verge of a more significant pullback.

Looking for longer-term forecasts on oil prices ? Check out the DailyFX Trading Guides .

Boosted by geopolitical tensions with Iran, crude oil prices had been trading with a higher bias throughout June and the first half of July. With Hurricane Barry bearing down on the US Gulf Coast region (hub of energy refinement and shipping), last week traders had pushed crude oil prices to their highest level since the end of May. Yet now that Hurricane Barry has come and gone and that geopolitical tensions with Iran are easing off, concerns over global growth thanks to the US-China trade war are beginning to come back into focus.

US Supply Levels Unfazed by Hurricane Barry

Against the backdrop the OPEC would be keeping its supply cuts until March 2020, Hurricane Barry represented a tangible threat to the short-term supply picture for the US; in turn, speculators had pushed crude oil prices higher. But data from the American Petroleum Institute (API) yesterday and the US Energy Information Administration (EIA) today suggest that supply drawdowns were not as significant as anticipated; the demand for energy simply wasn’t there.

Yesterday’s API report showed that oil supplies were drawn down by 1.4 million barrels, far less than the 2.7 million supply drop anticipated. Today, EIA data showed that crude oil inventories were down by 3.1 million barrels through July 12, less than the 4.2 million expected.

Geopolitical Tensions with Iran Ebb and Flow

A reminder: Iran is strategically important for the global supply chain for oil. The Strait of Hormuz, controlled by Iran, sees somewhere between 30-40% of the global oil supply pass through it every day. Accordingly, the repeated threats by Iran to cutoff access to this crucial global shipping lane have proven significant in shaping price action in energy markets.

That tensions with Iran appear to have a chance at easing (Iranian leaders have said to seek to resolve the dispute without further escalation), the near-term backdrop for oil prices is rapidly changing: whereas at the start of July, the focus was on tight supply thanks to OPEC+ and Hurricane Barry; now, the focus is on a lack of demand.

If the fundamental backdrop for crude oil prices is becoming more bearish in the near-term, there are implications for one of the strongest currencies in recent weeks, the Canadian Dollar (via USD/CAD). First, a look at crude oil price charts:

Crude Oil Technical Analysis: Daily Price Chart (July 2020 to July 2020) (Chart 1)

Crude oil prices may have been trading in a symmetrical triangle since the end of May that is seeing a breakdown emerge this week. Breaking the trendline from the June 18 and July 5 bullish outside piercing candles lows yesterday, crude oil prices are finding follow through to the downside today. Now, price has fallen back below the daily 21-EMA (although the daily 8-, 13-, 21-EMA envelope is not in sequential order). Although both daily MACD and Slow Stochastics are in bullish territory still, they are quickly shifting back towards bearish territory (sell signals could come later this week). A drop back to trendline support from the December 2020 and July 2020 lows should not be ruled out.

IG Client Sentiment Index: Crude Oil Price Forecast (July 17, 2020) (Chart 2)

Crude oil prices : Retail trader data shows 55.6% of traders are net-long with the ratio of traders long to short at 1.25 to 1. The number of traders net-long is 3.9% higher than yesterday and 9.1% lower from last week, while the number of traders net-short is 8.9% lower than yesterday and 1.4% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests crude oil prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger crude oil price bearish contrarian trading bias.

USD/CAD Technical Analysis: Daily Price Chart (September 2020 to July 2020) (Chart 3)

The path of least resistance for USD/CAD remains to the downside, even if the near-term picture is getting cloudier. USD/CAD remains below the rising trendline from the February 2020, September 2020, and March 2020 swing lows. Similarly, USD/CAD continues to trade below the daily 8-, 13-, and 21-EMA envelope. Yet with crude oil prices turning lower, it is possible that USD/CAD sees some of this bearish momentum ease. Indeed, both daily MACD and Slow Stochastics are trending higher, albeit in bearish territory. Traders may want to wait to see how a USD/CAD rebound takes shape before attempting to reengage the downtrend.

IG Client Sentiment Index: USD/CAD Price Forecast (July 17, 2020) (Chart 4)

USD / CAD: Retail trader data shows 60.0% of traders are net-long with the ratio of traders long to short at 1.5 to 1. In fact, traders have remained net-long since Jun 26 when USD / CAD traded near 1.3182; price has moved 1.0% lower since then. The number of traders net-long is 0.9% higher than yesterday and 12.6% lower from last week, while the number of traders net-short is 10.5% lower than yesterday and 12.3% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD / CAD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD / CAD-bearish contrarian trading bias.

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Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment ; quarterly trading forecasts ; analytical and educational webinars held daily ; trading guides to help you improve trading performance , and even one for those who are new to FX trading .

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To cont act Christopher Vecchio, e-mail at [email protected]

Follow him on Twitter at @CVecchioFX

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