USD/CAD retreats again as crude oil continues surge to new highs
James Chen, CMT May 16, 2016 12:50 PM
Prior to the current crude oil uptrend that began in mid- to late January, oil prices had been persistently plagued by concerns over a global glut that appeared nearly impossible to rectify in the near-term. This situation was exacerbated by major oil-producers largely unwilling to cut or even just limit production due to fears of losing market share.
Within the past four months, however, the once-dire situation has begun to alleviate itself as US crude oil production has slowed markedly due to attrition caused by the prolonged period of low prices, and a series of other production slowdowns has started to unbalance the global supply picture.
Earlier this month, wildfires in Canada dramatically disrupted Canadian oil production, although output has been recovering since then. Separate declines in production have also occurred in other major oil-producing nations, including China, Venezuela, and most recently, Nigeria. Also helping to support crude oil prices last week was a report by the US Energy Information Administration of an unexpectedly large decrease (-3.4 million barrels) in US crude oil inventories, as well as a rise in the global oil demand forecast for 2016 to 1.2 million barrels per day by the International Energy Agency.
The rise in oil prices due to these and other factors has strengthened the Canadian dollar dramatically over the past four months, as Canada’s economy is heavily dependent upon oil exports. This has resulted in a sharp slide for USD/CAD from January as the Canadian dollar has surged on the back of recovering oil prices while the US dollar has generally lagged since the beginning of the year.
Most recently, the USD/CAD downtrend reached its bearish target and a new 10-month low around 1.2500 support in early May before rebounding. The rebound was prompted by a US dollar resurgence and a pullback in crude oil prices, which pushed the currency pair back up to major psychological resistance at 1.3000 by early last week. The 1.3000 level is also in the vicinity of the 61.8% Fibonacci retracement of the last bearish run from the late-March high down to the noted early-May low around 1.2500.
Throughout May thus far, USD/CAD has been unable to break out above this major 1.3000 resistance level, largely due to the fact that crude oil has persistently strengthened. In the event that oil prices remain supported and USD/CAD continues to trade under 1.3000 resistance, a breakdown below the next major support level to the downside at 1.2800 could potentially prompt a substantial move back down to the noted 1.2500 support target.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.