Crude Oil Price Talking Points:
- The Canadian Dollar is under pressure after the Bank of Canada’s May policy meeting, while oil prices have been hit by global growth concerns.
- The drop in crude oil to fresh monthly lows may help spur a bullish breakout of USDCAD’s five-week range.
- Recent changes in retail trader positioning suggest that USDCAD prices may still have room to trade higher.
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Ahead of the weekly US Department of Energy inventory figures due out tomorrow, crude oil prices have taken a drop into fresh monthly lows amid rising global growth concerns. With the US-China trade war deepening with no end in sight, evidence is starting to mount that global trade has started to cool off. The US is not immune to this trend either: after posting a 3.2% annualized growth rate in Q1’19, the Atlanta Fed GDPNow growth tracker sees Q2’19 US GDP in at 1.3%.
While the geopolitical backdrop is already tense given conflicts between the US and Iran, rising oil inventories have been the predominant force driving energy markets in recent weeks. The most recent oil inventory report for the week ended May 17 showed a larger than expected build in supplies, with crude oil inventories jumped by 4740K barrels versus an expected decline of -1283K.
With the fundamental backdrop proving precarious in the near-term, the technical outlook for crude oil prices has become treacherous as well. In our last update, we warned of a potential bearish outside engulfing bar forming on the weekly timeframe; this manifested with a close below 60.63 last Friday. As longer-term technical signals suggest more weakness ahead, the daily chart suggests that momentum is firmly pointed to the downside at present time.
Crude Oil Technical Analysis: Daily Price Chart (April 2018 to May 2019) (Chart 1)
The daily price chart showcases the firming bearish momentum in crude oil prices. Extending further below its daily 8-, 13-, and 21-EMA envelope, crude oil’s drop to a fresh monthly low constitutes a continuation effort lower after we said that “a return to the May 2019 low at 60.02 should not be ruled out over the coming sessions” in our last update. Both daily MACD and Slow Stochastics are trending lower in bearish territory. To this end, with a close below 60.02, crude oil prices may be pointed for the 38.2% retracement of the 2018 high-low range at 55.24. A bearish bias is appropriate until crude oil prices return back above the daily 8-EMA (currently at 59.74).
IG Client Sentiment Index: Crude Oil Price Forecast (May 29, 2019) (Chart 2)
Crude oil: Retail trader data shows 61.7% of traders are net-long with the ratio of traders long to short at 1.61 to 1. In fact, traders have remained net-long since May 22 when crude oil prices traded near 6107.9; price has moved 6.5% lower since then. The number of traders net-long is 1.1% lower than yesterday and 21.0% higher from last week, while the number of traders net-short is 4.8% higher than yesterday and 23.6% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long crude oil prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed crude oil trading bias.
USDCAD Technical Analysis: Daily Price Chart (April 2018 to May 2019) (Chart 3)
As was the case last week, with crude oil prices dropping, the oil-sensitive Canadian Dollar has seen an uptick in selling pressure. It still holds that, since the close on April 23, USDCAD prices have closed every session between 1.3377 and 1.3521. Today, however, after the May Bank of Canada rate decision, and in concert with the drop in crude oil prices, USDCAD may finally be attempting to breakout of its five-week long consolidation.
Should USDCAD close above 1.3521, we would again be looking at topside breakout opportunity, while a drop below 1.3377 would constitute a downside break of the consolidation as well as a break of the uptrend from February, March, and April 2019 swing lows.
IG Client Sentiment Index: USDCAD Price Forecast (May 29, 2019) (Chart 4)
USDCAD: Retail trader data shows 26.9% of traders are net-long with the ratio of traders short to long at 2.72 to 1. In fact, traders have remained net-short since May 22 when USDCAD traded near 1.34326; price has moved 0.8% higher since then. The number of traders net-long is 28.6% higher than yesterday and 30.8% lower from last week, while the number of traders net-short is 42.4% higher than yesterday and 78.0% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USDCAD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USDCAD-bullish contrarian trading bias.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail at firstname.lastname@example.org
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