Despite US government data on Wednesday showing a surprise draw in crude oil stockpiles of 754,000 barrels for last week, against previous expectations of over a 3-million-barrel build, oil prices failed to rally. Quite the opposite, the West Texas Intermediate (WTI) benchmark dropped to a new 12-year low around the $27 level.
This drop extends Tuesday’s plunge, which indicates that the market has low confidence in a successful output deal among oil-producing nations materializing anytime soon. Even pronouncements by Iran’s oil minister on Wednesday that asserted the country’s willingness to negotiate on output with Saudi Arabia failed to boost foundering oil prices.
Since the Canadian dollar is closely correlated with crude oil prices due to Canada’s reliance on exports of oil products, the USD/CAD currency pair has been strongly affected by the continued plummet in crude oil.
While USD/CAD has, since mid-January, been mostly entrenched within a sharp pullback from multi-year highs around 1.4600 resistance, the hammer candle last week that reached down to a new year-to-date low of 1.3638 has prompted a pivot back to the upside. Could this be signaling a potential end to the recent pullback, especially in light of persistently depressed oil prices?
This could be the case, as Wednesday saw USD/CAD rise up to approach the key 1.4000 psychological level once again as crude oil fell to new lows and the US dollar regained a bit of its recently lost strength.
From a longer-term perspective, the currency pair continues to trade within a strong bullish trend, despite the noted pullback in late January and early February. With the prospect of a successful oil output deal somewhat difficult to imagine given strong underlying differences among major oil-producing nations, continued weakness in crude could be one of the catalysts that potentially propels USD/CAD to new highs. In the short-term, the key 1.4000 psychological resistance level continues to be the major level to watch. With any sustained breakout above 1.4000, the currency pair could be on track once again to target 1.4200 resistance followed by a potential retest of the noted 1.4600 resistance level further to the upside.