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An Underrated New Catalyst Fueling USD/CAD

An Underrated New Catalyst Fueling USD/CAD

2013-11-19 20:30:00
Liam McMahon, Head Forex Trading Instructor

Talking Points:

  • The "Renaissance" in US Energy Production
  • Canada Loses Critical Oil Buyer
  • Understated Potential Impact on USD/CAD

The United States has long been known as a massive consumer of fossil fuels, including oil and natural gas, and for the past 30 or 40 years, energy security has been a major concern of politicians and government agencies alike.

The US has actually begun taking steps to reduce dependence on foreign energy sources, especially since many of these sources are located in the Middle East, a region not known for its political stability.

This drive for increased domestic fuel production has led to the rise in hydraulic fracking, a controversial new way of extracting oil from previously untapped sources, which, in turn, has greatly increased domestic oil production.

US oil production has increased so much, in fact, that the US Energy Information Agency (EIA) began projecting that the US will become a net exporter of crude oil for the first time since 1995.

Guest Commentary: US Moves Towards Energy Independence

An_Underrated_New_Catalyst_Fueling_USDCAD_body_GuestCommentary_LMcMahon_November19A_1.png, An Underrated New Catalyst Fueling USD/CAD


That projection actually began to come to fruition earlier this month when the EIA announced that US crude oil production averaged 7.7 million barrels per day and exceeded imports for the first time since 1995.

Furthermore, total petroleum net imports in October fell to the lowest level since 1991. The EIA is projecting that total US crude production will average 7.5 million barrels per day this year before jumping up to 8.5 million per day in 2014.

While this is great news for the American consumer, it may not be such great news for our neighbors to the north. Most people tend to think about the Middle East when discussing oil imports, but the leading importer of oil to the United States is actually Canada, and by quite a wide margin.

According to the EIA, in August, the United States imported 2,613,000 barrels of crude a day from Canada, nearly twice as much as the number-two provider, Saudi Arabia.

If Canadian oil isn’t finding a home in the United States, it will still be able to find a home elsewhere, most likely China or India, but that will come at the price of increased transportation costs, among other complications.

If US companies were to stop buying oil from Canada, it would reduce one of the most important real money supports for the Canadian dollar (CAD), thus boosting USDCAD.

Right now, USDCAD is trading far closer to its 20-year lows than its 20-year highs, suggesting the pair may have some room to move to the upside. USDCAD made its 20-year low at 0.9056 in late 2007, while the 20-year high at 1.6189 was set in early 2002.

USDCAD hasn’t shown much dollar strength since the 2008 financial crisis. The pair quickly gave back its crisis gains after spiking up to just above 1.30.

In my opinion, the market hasn’t done a good job pricing in this significant shift in energy policy and how it may impact USDCAD. The pair is currently well supported by a monthly trend line and the 50-month exponential moving average (EMA) (in red), and I expect the pair to use this support level to begin an assault on 1.10.

Guest Commentary: The USD/CAD Pursuit of 1.10

An_Underrated_New_Catalyst_Fueling_USDCAD_body_GuestCommentary_LMcMahon_November19A_2.png, An Underrated New Catalyst Fueling USD/CAD

While some significant swings are possible as the market begins to prepare for the Fed’s eventual tapering of QE measures, I firmly believe that we will see USDCAD climb towards that 1.10 figure and beyond in the coming months (or years) as the pair finds a new range to reflect this new reality.

By Liam McMahon, Currency Strategist,

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.