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Oil Dips as Pivotal USDCAD Levels Come Into View

Published August 23, 2016
  • Overnight market action has been rather subdued, with the USD index slightly weaker following a broad rally against the majors on Monday
  • Oil is sticking out amid otherwise calm conditions as it gives up another 1% this morning; a total loss of 4.5% since hitting $48.75 on Friday, the peak of a 25% 12-day rally
  • Traders scrambled to adjust positions and gain exposure to the long side of the market as speculation that OPEC members might reach an agreement on production at their September meeting reached a fever pitch last week following positive comments from the Saudis
  • That sudden shift in sentiment caused short positions to unwind at a remarkable pace, however, the reality of supply/demand imbalances are beginning to take over once again as the feel-good sentiment behind the rally wanes
  • Even if OPEC could reach agreement on a production freeze, current levels of output in many member nations are at near record highs meaning that the impact to fundamental imbalances would most likely prove negligible and insufficient to sustain prices at current levels
  • USDCAD traders should take note of this dynamic and the resulting increase in volatility that may be enabled over the coming months
  • The US dollar is close to moving above some key technical levels against the Loonie which may reignite bullish sentiment
  • The 100 day moving average sits at 1.2930 as does the 38.2% retrace of the recent 1.3200-1.2765 decline; a close above that level would be a positive sign for those bullish on the greenback
  • Finally, the economic calendar is bare for Canada this week but the US has slew of important data releases starting later this morning with Manufacturing PMI and New Home Sales coming out at 945am and 10am ET respectively
  • With no Canadian data to offset those from the US, the market may prove to be more volatile than usual, especially with Fed Chair Janet Yellen's speech from Jackson Hole capping off the week this Friday

Charts: (1) USDCAD back to range trading as uptrend broken – need to get above 1.2930 short term and 1.3000 medium term for bulls to take over. (2) Oil rally taking a breather. (3) Economic Calendar is dominated by the US this week.