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Further CAD Downside Possible on Firmer USD, Weaker Crude Oil

Further CAD Downside Possible on Firmer USD, Weaker Crude Oil

Martin Essex, MSTA, Analyst

USDCAD talking points:

- The Canadian Dollar is under pressure both from a firmer US Dollar and from the sliding price of crude oil; a major prop for the Canadian economy.

- Looking ahead, that CAD weakness could well persist.

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Canadian Dollar under pressure

The Canadian Dollar is being pummelled by both a stronger US Dollar and a slide in the price of crude oil, and that weakness may well persist.

In the forex markets, the US Dollar basket (DXY) has been climbing since Friday ahead of the release later today of the minutes of the late-January meeting of the rate-setting Federal Open Market Committee. Higher than expected US wages and inflation data have led to speculation that US interest rates could be increased faster than previously expected, while higher US Treasury yields have also benefited the greenback.

USD Basket Price Chart, Hourly Timeframe (February 15-21, 2018)

Further CAD Downside Possible on Firmer USD, Weaker Crude Oil

Chart by IG

Meanwhile, the price of US crude oil has been falling despite inventory declines at the Cushing, Oklahoma storage hub and a report that members and non-members of the Organization of the Petroleum Exporting Countries, including Russia, will discuss extending their cooperation on production beyond 2018 when they meet in June.

That news has been largely shrugged off as traders have argued that any shortfall in OPEC/non-OPEC output can be supplied by US producers increasing their production. Longer term, the increasing popularity of electric cars is also likely to curb oil demand and the price of crude has suffered as a result.

USD Crude Oil Price Chart, Five-Minute Timeframe (February 20-21, 2018)

Further CAD Downside Possible on Firmer USD, Weaker Crude Oil

Chart by IG

While the Canadian Dollar has already fallen on the combination of a rising US Dollar and a declining oil price, further follow-through on the downside seems likely.

USDCAD Price Chart, Five-Minute Timeframe (February 20-21, 2018)

Further CAD Downside Possible on Firmer USD, Weaker Crude Oil

Chart by IG

Adding to the pressure on the Canadian Dollar, the gap between Canada’s two-year government bond yield and its US equivalent widened Tuesday by 3.3 basis points to -39.9 basis points, its widest since June 26.

Also, Canadian wholesale trade data showed a fall of 0.5% because of lower sales in the personal and household goods sector, Statistics Canada said. Analysts had forecast an increase of 0.4% and the data suggest that growth in the economy in December could be poor.

--- Written by Martin Essex, Analyst and Editor

Feel free to contact me via the comments section below, via email at martin.essex@ig.com or on Twitter @MartinSEssex

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