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Seasonality Concerns Come into Play for both WTI and the Loonie

Published August 11, 2016
  • Overnight market action saw a slight rise for the US dollar as commodity prices were broadly weaker and equities in the US pointed to a slightly higher open
  • The greenback has been trading in a stubbornly tight range since last week's positive payrolls data; given the strong 6 month trend in jobs gains of 189k/month, one would think that the market would be more positive towards the Fed hiking rates by the end of the year
  • This may still happen, however at present the dominant theme is that the Fed will be on the sidelines due to global growth concerns that are forcing other countries to lower rates and increase QE programs to support their economies
  • That said, USDCAD is exhibiting some tendencies that point to the next five months being a period of increased volatility
  • 6 month options volatility for the pair is a the lowest it has been all year at 8.7 – the high came in February at 11.6 and that 33% drop in volatility expectations may mean that the market is overly complacent at present
  • In addition, seasonal trends in oil prices point to the next five months being very volatile and potentially damaging to crude prices (and, by proxy, the Canadian dollar)
  • Seasonality studies reveal that crude prices trend to peak in July or August and then decline the rest of the year
  • Over the last five years WTI prices have declined by an average of -13.67% during this time period (Chart 2)
  • Such a strong trend likely doesn't bode well for the Loonie and you can see that this has been the case with average declines of -3.8% in CADUSD during the same period (Chart 3)
  • Although history is not guaranteed to repeat itself, this could be very important information for corporate hedgers planning the rest of their hedging cycles for 2016

Charts: (1) USDCAD uptrend intact. (2) WTI Seasonality Study AUG – DEC, 5-year average price drop is in white.  (3) CADUSD Seasonality Study AUG – DEC, 5-year average price drop is in white. (Seasonal charts are rebased to zero.)