USD/CAD extends NFP-driven, oil-fueled plunge

Aside from the upcoming EU referendum in two weeks that will decide whether the UK stays in the European Union or not, two major themes have made a hefty impact on global markets recently – the Fed’s vacillating monetary stance and the strength of crude oil prices. When combined, these two factors have led to a precipitous fall for USD/CAD since late last week.

The immense disappointment in US non-farm payrolls (NFP) employment numbers on Friday (38K jobs added in May vs 160K expected) led to an expectedly dovish turn by the Federal Reserve, at least with respect to Fed Chair Janet Yellen’s comments on Monday, which conspicuously omitted any reference to a rate hike being "appropriate in coming months." Of course, FOMC members had stressed in recent weeks that an impending rate hike would be contingent upon further expected improvement in US economic data. Friday’s employment numbers clearly did not fulfill that contingency. While Yellen did state on Monday that interest rates "need to rise gradually over time", the timetable will very likely be postponed again due to the dismal jobs data as well as the upcoming risk of a UK exit from the EU. This has weighed heavily on the US dollar, as it has continued to decline sharply for the past four trading days.

Also this week, crude oil supply in Nigeria has been severely disrupted due to attacks on oil facilities by a militant group. These attacks have pressured Nigerian oil output down to a 20-year low. Additionally, the US Energy Information Administration reported on Wednesday a large draw of -3.2 million barrels in US crude oil inventories last week, which followed previous data from ADP of a 3.6-million-barrel draw. This combination of factors weighing on oil supply served to boost the West Texas Intermediate benchmark to a new high above $51 and the Brent Crude benchmark above $52 on Wednesday. In turn, surging crude oil prices have also boosted the closely-correlated Canadian dollar.

Together, NFP-driven pressure on the US dollar and the oil-fueled boost to the Canadian dollar have prompted a sharp retreat for USD/CAD. After this past Friday’s US jobs report release, the currency pair broke down decisively below the 1.3000 psychological level, and then proceeded to follow-through on that breakdown this week to fall below both its 50-day moving average and the major 1.2800 support/resistance level. This retreat has extended the late-May pullback from the 1.3200 resistance area. As the US dollar continues to be pressured by declining expectations of a near-term Fed rate hike, and crude oil continues to be supported by supply decreases and disruptions, the next major downside target for USD/CAD continues to be at the 1.2500 support area, where the currency pair established a new low in early May.

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