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Oil Prices May be Creating an Even Larger Problem for Canada

Oil Prices May be Creating an Even Larger Problem for Canada

James Stanley, Senior Strategist
Oil Prices May be Creating an Even Larger Problem for CanadaOil Prices May be Creating an Even Larger Problem for Canada

Fundamental Forecast for CAD: Bearish

  • In our previous forecast we looked at the prospect of improving fundamental data being offset by a deeper drop in Oil prices for the Canadian economy; and to accentuate this theme, we’ve seen a massively weak CAD despite better-than-expected employment numbers.
  • USD/CAD has continued its ascent, and retail traders have stuck to their bearish stance in the pair: This could lead to additional gains in USD/CAD, as SSI is a contrarian positioning indicator.
  • To get real-time updates on positioning changes in USD/CAD, applied directly on to your charts, you can download the SSI Snapshots indicator completely free-of-charge.

Just last week we reiterated our bearish forecast for the Canadian Dollar on the basis of expected weakness in Oil prices. And last week, that is exactly what we got. But we did also see some positive information on the Canadian economy with a better than expected jobs report on Friday morning to finish off the week. The unemployment rate for the Canadian economy dropped to 7% versus an expectation of 7.1% as 44.4k jobs were added to Canadian payrolls against an expectation for a 10k increase. But looking inside of the numbers will highlight that this isn’t really as bullish as it may first appear, as 32k of those jobs were temporary positions related to the recent Canadian election.

While this is a positive that meshes nicely with the recent uptick in GDP for Canada that may, in fact, see the country grow out of ‘recession territory’ at their next quarterly GDP-print, as we posited in our most recent CAD forecast, a larger driver in the currency (and hence, the economy) is the price of Oil. Drooping Oil prices were largely to blame for the country entering ‘technical recession’ category only two months ago, but as prices have continued to drive lower, the fear is that the follow-through effect could bring more pain for the Canadian economy in the coming months before matters improve. There is a lag to this impact because it takes time for companies to respond to pressures in commodity prices and, in turn, for this change in the macro and micro-economic data to appear. July was a brutal month for Crude, as we saw prices drop from over $59 to below $47, and we may not have seen this impact fully filter into Canadian numbers just yet, and this could bring continued weakness into the CAD.

Data for the coming week is rather light; with Canadian housing numbers on Monday followed by BoC commentary on Tuesday and Thursday from Council Member Wilkins. But perhaps more advantageously, traders could tilt their direction to the expected continuation in divergence between the Canadian economy and their southern neighbors in the United States. Friday’s NFP report showed a blowout print on the American jobs front, and this has raised hopes for a December rate hike out of the Federal Reserve. So while near-term direction on the Canadian Dollar may be slightly opaque due to a lack of relevant data and the competing forces of improving econ data while oil prices fall further, traders can look at this as a divergence-play by selling the Canadian Dollar against its US-counterpart.

From a technical perspective, this was a big week for USD/CAD as we’re approximately 245 pips higher than last week’s close, and we’re a mere ~150 pips off of the 11-year high in the pair (11-year low for the Canadian Dollar). With little data on the docket for next week, traders may be able to buy a retracement in the pair (selling the CAD), should support materialize at 1.3250 (major psychological level), or 1.3150 (prior price action swing-low). This could open the door for targets at 1.3400, 1.3450 (the previous-high), and then 1.3500 (major psychological level).

Should 1.3500 get hit in USD/CAD, then we’re trading at new highs again, and this is where traders can look to scale-out of positions as even more new highs print in the pair.

The forecast remains bearish on the Canadian Dollar moving forward.

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

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