USD/CAD Bounces As Oil Prices Retreat

USD/CAD caught a bid in the North American session as oil prices fell under pressure. The pair is on track to post a green candle on a daily chart to snap a prior three-day losing streak although the gain for the day thus far is marginal.

USD/CAD posted the lowest close in 14-months on a weekly chart following last week’s drop. The bulk of the week’s decline resulted from a rate hike from the Bank of Canada which was viewed as a hawkish hike by many analysts. The BoC rate increase was well communicated and is responsible for most of the 600 point drop in the exchange rate over the last three weeks.

The pair found some support at 1.2654 on Friday and after a brief dip below the level today, the pair is on track to close the day out above it. The level marks the June 2016 low and while it can result in a bounce, significant overhead resistance is seen within close proximity.

Resistance at 1.2720 is a major level on a monthly chart. The level triggered a turn lower in 2009 which resulted in a three-year decline. The level once again came into play in the first quarter of 2015 and held the pair lower on several attempts. Last week, the level held the decline following the BoC meeting.

WTI crude oil prices (USOIL) recovered last week and closed the near highs to erase losses from the prior week. The correlation between oil prices and the Canadian dollar shows a significant divergence as of late, attributed to the shift in Canadian monetary policy, but the correlation has regained some strength as of Friday.

Oil prices fell under pressure today slight ahead of the $47.07 price point that had triggered the turn lower earlier this month. Today’s decline has nearly wiped out Friday’s losses and a daily close near current levels would result in a bearish engulfing print on a daily chart which could keep oil prices under pressure in the early week.

The US Dollar index (DXY) broke below support from the June low on Friday following weaker than expected CPI and retail sales data from the United States. A range has played out since the weekly open and DXY was last seen trading at 95.18, relatively unchanged on the day. Near-term resistance falls at the June low of 95.47.

Positioning in the loonie is no longer at an extreme as the latest COT report shows a further covering of short contracts as well as a build in the gross long. The net short declined from 39,372 to 8,604 contracts. In late May, the net short had hit a record 99,109 contracts.

As the COT report reflects positioning adjustments ahead of the BoC meeting, it is likely the position has shifted to a net long at this point.

The shift in the position has been rapid but rightfully so as the BoC provided the appropriate catalyst. However, a bulk of the shift in positioning since the May peak has been as a result of a short covering rather than an aggressive build of long contracts which suggests there will be loonie demand on any significant dips.

USD/CAD 4-Hour Chart

USDCAD 4H July 17

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.