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USD/CAD Price Outlook: Dollar Builds a Base, Loonie Eyes Oil

USD/CAD Price Outlook: Dollar Builds a Base, Loonie Eyes Oil

2020-07-16 21:47:00
Rich Dvorak, Analyst
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USD/CAD PRICE ACTION BOUNCES OFF TECHNICAL SUPPORT, CANADIAN DOLLAR MIRED BY CRUDE OIL & BOC OUTLOOK

USD/CAD price action has fluctuated within a rough 300-pip trading range since mid-June. This major currency pair has drifted sideways alongside several other rangebound markets – like crude oil, the S&P 500, and even Bitcoin – as traders hang in ‘wait and see mode’ largely due to the juxtaposition of both bullish and bearish fundamental undercurrents.

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Appetite for risk seems to have deteriorated correspondingly as investor optimism wanes amid rising coronavirus cases and decelerating recovery in economic activity. This development was just alluded to in the press statement accompanying the latest BoC interest rate decision. Specifically, the Bank of Canada stated how economic slack is expected to persist as pent-up demand dissipates after reopening from the coronavirus lockdown. The BoC added how this will likely create “significant disinflationary pressures.”

USD/CAD PRICE CHART: DAILY TIME FRAME (27 DEC 2019 TO 16 JUL 2020)

USDCAD USD CAD Price Dollar Chart Forecast

USD/CAD turned lower in response to Bank of Canada rate outlook provided yesterday, but the Canadian Dollar is currently on pace to erase nearly all of those gains. USD/CAD caught a bid early Thursday around its recent base near the 1.3500-handle and spot prices have ripped higher by about 70-pips since.

USD/CAD BULLISH
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Change in Longs Shorts OI
Daily -6% -2% -5%
Weekly -21% -18% -20%
What does it mean for price action?
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That said, USD/CAD price action now flirts technical resistance highlighted by a confluence of the 50-day and 200-day moving averages in addition to the 61.8% Fibonacci retracement level of its year-to-date trading range. Perhaps another influx of risk aversion and return of safe-haven demand might give the US Dollar a boost meaningful enough to catalyzes a topside breakout above the bearish trendline extended through the series of lower swing highs recorded since mid-March.

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On the other hand, a death-cross looms and could steer spot USD/CAD lower if the medium term bearish trend can overpower the broader bullish trend. Breaching support underpinned by the 1.3500-price level might see the Canadian Dollar strengthen further against its USD peer with June swing lows potentially eyed as the next layer of defense.

CANADIAN DOLLAR INDEX & CRUDE OIL PRICE CHART: 1-HOUR TIME FRAME (20 MAY TO 16 JULY 2020)

Crude Oil and Canadian Dollar Price Chart

Chart created by @RichDvorakFX with TradingView

Nevertheless, keeping close tabs on crude oil price action may provide an indication as to where the Canadian Dollar and USD/CAD might head next. This is widely in consideration of the strong direct relationship typically maintained between CAD and oil. Crude oil has struggled to surmount the $41.00/bbl price with the commodity rejecting this level three times since June 23.

As previously mentioned, expectations for a robust and sustained recovery in global GDP growth have been undermined by fading rebounds across key economic indicators recently. Not only does this seem to be keeping a lid on crude oil prices, it appears to have helped form a top for the Canadian Dollar and base for spot USD/CAD.

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If crude oil can eclipse this nearside technical barrier, however, it could suggest that broader market sentiment remains cautiously optimistic, and potentially signal another broad risk rally lurks on the horizon. This would likely stand to drive USD/CAD price action lower in turn.

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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

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