The US dollar has eased off its best levels after rebounding across the board following the release of some strong US macroeconomic pointers on Tuesday. In addition, the Fed’s Dennis Lockhart tried to talk up the potential for a June rate hike, suggesting that the "markets may be reading this more pessimistically [than he is]" as the economic outlook for the US remained robust. Meanwhile, the Canadian dollar has weakened against most major currencies despite the fact crude oil prices have repeatedly hit new 2016 highs this week. Consequently, the USD/CAD pair has been able to hold its own relatively well. In part, the breakdown between oil prices and the Canadian dollar can be explained away by the impact of the wildfires, as not only has this had a direct impact on Canadian oil output but also wider negative economic implications. Unfortunately, things could go from bad to worse for the CAD if oil prices were to pull back sharply now from these relatively elevated levels.
The Loonie will be in focus again today ahead of the US weekly crude stockpiles report and the FOMC’s last meeting minutes. If oil prices fall, say on a surprise crude inventory build or otherwise, then the USD/CAD may finally break out of its recent consolidation range to the upside, above 1.30. Indeed it would be a ‘surprise’ if oil inventories had risen last week, for the API has estimated that supplies fell 1.1 million barrels and the official EIA data is expected to show a larger 3.1 million decrease, largely because of lower oil exports from Canada. Conversely, if oil prices rise significantly then the Loonie may once again go for a test of the long-term support/resistance level of 1.2835, before making its next move.
As ever, it is the reaction of price to news – rather than the news itself – that will be more important when it comes to trading. So, whatever today’s news may turn out to be, watch the reaction of the USD/CAD around the key short-term resistance and psychological level of 1.3000 on the upside and 1.2835 on the downside. A potential break above 1.3000 may pave the way for an eventual rally towards the 38.2% Fibonacci retracement of the recent downswing at 1.3310/15 or the 200-day moving average at 1.3360. Alternatively, a decisive break back below the pivotal 1.2835 level could potentially pave the way for an eventual re-test of the 1.2500 handle at some point.
Meanwhile WTI crude oil (figure 2) has reached the 61.8% Fibonacci retracement against the May 2015 high. Given the technical importance of this level and the fact that the RSI is suggesting oil prices are "overbought," I wouldn’t be surprised if we were to see a pullback of some sort even if this afternoon’s US oil stockpiles report shows a large drawdown.