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USD/CAD Rate Forecast: Saudi Threat Brings Prospect of CAD Washout

USD/CAD Rate Forecast: Saudi Threat Brings Prospect of CAD Washout

2018-08-08 16:15:00
Tyler Yell, CMT, Currency Strategist
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Canadian Dollar Rate Forecast Key Takeaways:

  • The ONE Thing: Saudi Arabia is dumping Canadian assets. The news comes ahead of a steadily weakening Canadian Dollar with oil weakening as well as Friday’s CA employment data. A miss in Canadian data could lead to broader CAD weakness.
  • Crude oil prices have fallen materially on the back of US EIA Inventory data showing a smaller decline than originally expected in stockpiles. The move to US$66.5 in WTI is the lowest price since late June and further harms the Canadian Terms of Trade.
  • Technical Outlook: USD/CAD support sits at C$1.2962 per USD. While the momentum on the US Dollar has cooled, the environment favors further USD/CAD gains than losses. A break below C$1.2962 would favor a behavior shift in the market away from a USD-long bias theme prominent since February against CAD and to a USD-long reduction mode.

Key Technical Levels for Canadian Dollar Rate to US Dollar:

  • Resistance: C$1.3262 Trendline drawn from Jan 2016 high
  • Spot: C$1.3066
  • Support: C$1.2950 June 14 low - end of corrective triangle pattern/base of rising channel

Saudi Appears To Have the Upper Hand in Canadian Dispute

Markets moved on Tuesday showing Canadian Dollar weakness with little explanatory power. Only hours later did the development come out that Saudi Arabia is set to offload CA assets in response to Ottawa’s critiquing of Saudi’s arrest of a female activist.

Saudi’s central bank is expected to hold some $15B in Canadian dollars in reserves, as well as the state pension funds, are no doubt heavily involved in similar industry’s as Canada. The comment picked up on by the Financial Times’ source that the “Saudi central bank and state pension funds have instructed their overseas asset managers to dispose of their Canadian equities, bonds and cash holdings “no matter the cost,” should materially worry Canadian-exposed asset holders.

Wedge Pattern Beckons Volatility In USD/CAD

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Chart Source: IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT

USD/CAD continues to hold rising support showing underlying strength. The issue traders need to address is the longer-term trendline resistance shown above. Institutions hold excessive bullish sentiment and long positions on USD.

The sentiment could extend, and strength could continue as the fundamental backdrop looks to argue. A tired trend is not a dead trend, and US economic growth has accelerated this year. The broader risk appears to be the underlying concerns of risk appetite with the volatile balance of payment data from China, and horrific terms of trade data from Canada alongside weakening oil could precede sharp strength in USD/CAD.

The levels to watch with keen focus are C$1.2950 and C$1.3262 per USD. A break above C$1.3262 would show a break above a 2-year trend line that could well extend as it did in 2015 when the oil route was becoming a household topic of conversation. A break below C$1.2950 would argue the USD strength is cooling off, but would not necessarily lead to a favorable USD/CAD short trade.

WTI Crude Oil Breaks Down Leaving Less Hope For CAD Bulls

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Chart Source: IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT

The chart above shows a WTI crude oil, which is trading below the 100-DMA ($68.73) at $66.08. As mentioned above, the declining terms of trade and the spat with Saudi could put Canada at the wrong end of market forces at a time when risk sentiment appears top heavy.

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---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

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