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CAD Vulnerable as Policy Divergence and Oil Glut Take Centre Stage

Published August 9, 2016
  • Monday's three percent rally in crude came to a halt overnight as the impact of calls for another round of talks on production cuts between OPEC and non-OPEC members waned
  • Crude was 1% lower to $42.65 after hitting a high of $43.39 Monday before running into technical selling pressure at the 20 day moving average and the 38.2% retrace of the June/August decline
  • The Canadian dollar moved lower along with crude and increasingly looks poised to be ensnared by diverging policy rates between the US and Canada 
  • The market is currently only pricing in 50 basis points of tightening by the Fed through the end of 2019 
  • This seems rather low given recent accelerating jobs growth and thus it may be that the market is far too optimistic that the Fed will keep the cheap money flowing
  • Should the market have to readjust, rate differentials will move strongly in favour of the USD and could spark another secular USD bull market
  • USDCAD is showing some signs that this may be starting to play out, however trading action is still rather tethered to a relatively tight range
  • The uptrend since June has held on three occasions and critical support has been established just above the 1.3000 level
  • That said, the market really needs to get back above the 200 day moving average at 1.3312 for bullish enthusiasm to build; failure to do so and a drop below 1.3000 may see a larger pullback into the 1.2700 area
  • The Canadian economy is under pressure at the moment after posting a record trade deficit in June and having created a mere 71K new jobs in the past 12 months, all of which were part time…
  • …This leads me to believe that the path of least resistance in USDCAD is most likely higher
  • However, markets have proven anything but rational, as evidenced by Monday's 3% rally in crude sparked by the mere suggestion that twice failed negotiations on production cuts be rekindled… 
  • Should rumours somehow turn into an actual OPEC production cut (highly unlikely) or if the global supply glut should start to decelerate faster than anticipated, then we could see a real turn in fortunes for Canada and the Loonie

– JP Dore

Charts:  USDCAD remains in uptrend, key resistance at the 200 DMA of 1.3312 is the next major target.