Crude Oil Price Stability Gives Room for USD/CAD Selloff - Can it Last?
Crude Oil Prices Overview
- The Canadian Dollar has been able to take advantage of a weak US Dollar, thanks in part to crude oil prices warding off bearish breakout attempts from its multi-week sideways range and multi-month symmetrical triangle.
- USDCAD’s selloff in recent days has been bolstered by a much stronger than anticipated August Canada jobs report, however, without more gains by crude oil prices, there may not be much room left.
- Recent changes in retail trader positioninggive us a stronger USDCAD-bullish contrarian trading bias.
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The relaxation of tensions between the world’s two largest economies around the US-China trade war has been a bonafide bullish catalyst for global financial markets. As investors have shifted away from their safe haven preferences and moved into higher yielding and high beta currencies, the commodity currencies have been able to claw back some of their precipitous losses that accumulated during August.
For the Canadian Dollar, the tailwinds are a bit stronger than its Australian and New Zealand Dollar counterparts thanks to a much stronger than expected August Canada jobs report. Now that the US-China trade war back in a state of détente, the correlation between Fed rate cuts and global growth concerns have eased off; in August, what was good for the USDCAD was bad for crude oil prices.
A further de-escalation of the US-China trade war may allow the typical historical relationship – crude oil up, USDCAD down – to be restored, if only temporarily.
Crude Oil Technical Analysis: Weekly Price Chart (January 2016 to September 2019) (Chart 1)
A fresh assessment of the weekly chart suggests that crude oil prices are mired in two long-term patterns of neutrality: since the start of May 2019, a descending triangle; and since the end of September 2018, a symmetrical triangle. Crude oil prices are hovering just below the weekly 13-EMA (one-quarter moving average). Meanwhile, weekly MACD and Slow Stochastics are in bearish territory but continue to drift higher. More patience is needed before a decisive break can be called.
Crude Oil Technical Analysis: Daily Price Chart (August 2018 to September 2019) (Chart 2)
In our last crude oil technical forecast update, it was noted that “momentum in crude oil prices is flat at present time…that there is a lack of agreement among the technical indicators is clear; if crude oil prices are enduring another false breakout attempt, a ‘return into the symmetrical triangle’ may be judged upon a return back above the daily 21-EMA, currently 55.14.”
Crude oil prices did indeed return into said triangle, and a fresh assessment of the daily chart suggests that prices may be consolidating in a clearer descending triangle since early-May 2019. To this end, there is little clarity on the next move for crude oil prices; traders should be open to both bullish and bearish outcomes.
IG Client Sentiment Index: Crude Oil Price Forecast (September 6, 2019) (Chart 3)
Crude oil prices: Retail trader data shows 52.5% of traders are net-long with the ratio of traders long to short at 1.11 to 1. The number of traders net-long is 6.2% higher than yesterday and 8.4% higher from last week, while the number of traders net-short is 22.0% lower than yesterday and 7.6% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests crude oil prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger crude oil price-bearish contrarian trading bias.
Relationship Between Crude Oil and Canadian Dollar Strengthening
For a currency with an economy whose energy sector constitutes approximately 11% of GDP, the Canadian Dollar historically has been sensitive to movements in crude oil prices. In our last crude oil technical update on August 27, the 5-day correlation between USDCAD and crude oil prices was 0.63 and the 50-day correlation was -0.77; today, the 5-day correlation is -0.82 and the 50-day correlation is -0.66.
USDCAD Technical Analysis: Weekly Rate Chart (December 2016 to September 2019) (Chart 4)
The weekly chart speaks to USDCAD’s bearish potential more clearly than the daily chart. A bearish outside engulfing bar at recent trend highs marks a bearish key reversal, suggesting that the focus for traders should be on the downside for the foreseeable future.
USDCAD Technical Analysis: Daily Rate Chart (September 2018 to September 2019) (Chart 5)
Thus persists the stability in crude oil prices that have given the Canadian Dollar cover to rally. As noted in the last USDCAD technical forecast update, “the uptrend from the July and early-August swing lows broke yesterday. The path of least resistance is no longer to the topside in the near-term. A deeper pullback would increase in probability should USDCAD close below 1.3250.”
USDCAD was able to close below its rising trendline from the July and August 2019 swing lows yesterday, and has started to move comfortably below 1.3250. The daily 8-, 13-, and 21-EMA envelope is shifting into bearish sequential order, while Slow Stochastics has dipped into oversold territory. Daily MACD is trending lower, albeit still above its signal line.
Further losses may eye the 61.8% retracement of the 2018 high/low range at 1.3119 in the short-term. However, USDCAD’s bearish outlook may be curtailed unless there is a decisive shift in retail trader positioning, which currently takes the opposite perspective on recent price action.
IG Client Sentiment Index: USDCAD Rate Forecast (September 6, 2019) (Chart 6)
USDCAD: Retail trader data shows 41.3% of traders are net-long with the ratio of traders short to long at 1.42 to 1. In fact, traders have remained net-short since July 23 when USDCAD traded near 1.3044; price has moved 1.0% higher since then. The number of traders net-long is 7.9% lower than yesterday and 24.5% higher from last week, while the number of traders net-short is 0.2% higher than yesterday and 30.7% lower 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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