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USDCAD Uptrend Being Tested Once Again Despite Lower Oil

Published August 10, 2016
  • Overnight market action was rather negative for the US dollar despite weaker oil and commodity prices as the USD index gave up just under 1% on broad based selling 
  • Yesterday's positive US Labour Cost data, which showed a 2% increase during Q2, seems to have been overshadowed by a large -0.5% drop in productivity 
  • The data may be playing a role in extending expectations for when the Fed might hike rates, and the prospect of continuing loose monetary policy is helping global stock markets trade to record highs 
  • Counterbalancing this narrative, however, is the on-going glut in crude markets and refined oil products which point to a fundamental disparity in supply and demand and a weak global economic backdrop
  • Saudi Arabia indicated yesterday that its July production reached a record of 10.67 million barrels a day as it focuses on maintaining market share rather than trimming supply to boost prices
  • While the massive build in crude inventories is an oil story, the saturation of refined oil products is a relatively new phenomenon and results from refiners boosting production last year and early this year to cash in on cheap crude supply and hefty margins
  • With storage full and autumn refinery maintenance season coming up quickly, crude demand from refiners may drop off significantly which could put a hard cap on price rallies for both Brent and WTI
  • That underlying theme supports the view that the recent 10% rally in oil since early August is most likely traders cashing in on profitable short positions that have been amassed since WTI hit $50 in June, as opposed to fresh optimism surrounding an improvement on the supply/demand imbalance
  • Despite today's drop in crude to $42.50, the uptrend in USDCAD is being tested – a close below 1.3000 has the potential to bring a pause in this trend
  • Interest rate differentials still favour the USD over the Loonie and thus this may be a great opportunity for USD buyers to take advantage of
  • EIA oil inventories are due at 1030am ET which could provide more volatility for CAD traders

Charts:  USDCAD uptrend under pressure despite drop in crude as short covering rally looks to be over