USD/CAD Drops Lower As Oil Prices Extend Gains

A break higher in oil prices has resulted in a drop below support in USD/CAD which is seen trading lower by half a percent shortly after the European close.

WTI crude oil prices (USOIL) have been facing a confluence of resistance for most of the week as the 200-period daily moving average came into play this week and as prices had been retesting a broken channel that had contained price action for nine months.

There were several attempts this week to scale above the resistance confluence prior to the bullish break seen in the Asian session. A daily close above resistance appears probable and is likely to keep oil prices bid, in addition to expectations for further production cuts at the next OPEC meeting scheduled on May 25th.

The US dollar index (DXY) broke to fresh six-month lows after a failed recovery attempt yesterday. The index posted a bullish engulfing candle for Thursday to signal recovery potential but dropped sharply to break below support today.

Fed member Bullard commented on monetary policy and provided a dovish outlook. Bullard stated that the market reaction to the March rate hike as well as weaker economic data following the increase suggested that the Fed is too aggressive in its path of normalization. He also does not expect that a strong labor market will create much upward price pressure given the relation between the unemployment rate and inflation.

Economic data released from Canada today was mostly weaker than expected. Retail sales for March rose 0.7% to beat an expected gain of 0.4%. Core sales fell short of expectations with a decline of 0.2% versus an expected rise of 0.2%.

The Canadian consumer price index rose 0.4% in April against an expected gain of 0.5%. The annual rise of 1.6% was also short of the consensus for a rise of 1.7%.

The drop below support in USD/CAD at 1.3588 sets a bearish tone as the level marks a prior breakout level. The horizontal level reflects the November high and had triggered a turn in December. On a 4-hour chart, the pair is seen approaching the lower line of a declining channel. The lower bound of the channel falls within close proximity of a horizontal level at 1.3515 which marks prior resistance that held price action lower in March.

USD/CAD 4-Hour Chart

USDCAD 4H May 19

Jignesh is an analyst and trader, specializing in currencies and commodities. He utilizes a macro view as well as a proprietary method of pattern recognition that is based on the principles of Elliott wave. His focus is to assess strength in trends, and perceiving high potential turning points in the markets. He brings over 4 years of experience in his current role.