CAD reclaims a week of losses in risk on rally
USDCAD fell 1.5% yesterday as the CAD reclaimed a week’s worth of losses against the USD. The Canadian dollar was helped by a global wave of increased risk appetite on vaccine hopes, higher energy prices, and favourable commentary from Chairman Powell of the US Federal Reserve.
Higher energy prices are the crucial factor of the CAD’s gains. Reports from China indicate the world’s second largest economy is approaching pre-pandemic levels of oil consumption. This is promising for oil demand at present but also suggests a fairly quick rebound for countries still grappling with the virus.
If the outlook for oil continues to improve, I’d expect the CAD, a petro-currency, to continue to benefit.
Support at 1.3850 is a level to watch. USDCAD tested this level during April and bounced off both times. With improving sentiment, is it time the CAD strengthened and took USDCAD lower? A break below support on a daily closing basis would also be a successful double top formation, encouraging a bigger move lower.
Also watch the 50-day EMA (purple line), which USDCAD found support in last week. If USDCAD successfully powers past it, could the 50-EMA become a short-term resistance level?
Chart of the day: USDCAD back at resistance. Is this time different?
USDCAD is testing resistance once again at 1.3350. This time it feels the CAD has less conviction to strengthen and we ask: is this time different?
Considering the global virus panic, we must consider the CAD’s role as a petrocurrency. WTI crude is trading at two-year lows as the coronavirus spreads across the world, threatening global production and freedom of movement. Further travel restrictions and disruption to business, and oil falls further.
In a press conference this morning, Trump announced they would consider restricting travel from other virus hotspots, like Italy, if necessary and that plans were in place to quarantine US cities should the need arise. The concern is there, and should the virus make its way to the US, that’s bad news for the USD.
As long as the US withstands an outbreak of the virus, the USD should continue to hold. The US so far has confirmed 60 cases of the virus, and Canada 12.
Vol levels in USDCAD have picked up lately with a 5-day average true range (ATR) of 81 points, the highest of the year - although this is coming off all time lows.
The 1.3350 level is strong resistance now. A break above this level on the daily close could be the precursor to a strong move higher.
Chart of the day: Recovering crude prices give the CAD a nudge up Sean MacLean
USDCAD has broken support on the four-hour chart as oil prices begin to recover and we’re reminded of the CAD’s role as a petrocurrency. If the sellers can push this pair lower, we’re looking at a trend lower towards the 1.3150 level.
This is less of a CAD story and more of an oil story. As crude demand picks up in the macro picture, the CAD is reflecting the development with a move up (USDCAD down). To put perspective on this, the 20-day rolling correlation reveals an almost perfect negative correlation (-0.96) between USDCAD and WTI crude (XTIUSD).
If the newsflow out of China continues to improve (decreasing daily virus infections and production ramping up again), the outlook for oil will improve. In the short term, the petrocurrency CAD should continue to benefit from any improvement in oil prices.