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Crude Oil Price Range Resistance Holds, Keeping USD/CAD Rates Pointed Higher

Crude Oil Price Range Resistance Holds, Keeping USD/CAD Rates Pointed Higher

2019-11-14 18:30:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Crude Oil Price Forecast Overview:

  • Crude oil prices remain trapped in the sideways consolidation that has defined price action since October 31. Meanwhile, USD/CAD continues to press higher, extending its winning streak to five consecutive days, and up 11 of the past 13 sessions overall.
  • The 5-day correlation between USD/CAD and crude oil prices is 0.02 and the 20-day correlation is –0.71.; one week ago, the 5-day correlation was 0.35 and the 20-day correlation was -0.32.
  • Recent changes in retail trader positioning gives us a stronger bearish bias for both the Canadian Dollar and crude oil prices.

Looking for longer-term forecasts on crude oil prices or the Canadian Dollar? Check out the DailyFX Trading Guides.

Crude Oil Hit by Inventory Data

Crude oil prices have faced a minor setback on Thursday after data from the US Energy Information Administration showed an unexpected increase in energy supplies. In turn, oil-sensitive currencies like the Canadian Dollar are continuing to trade weaker on the session.

The latest data from the US EIA shows that oil inventories have now increased for the seventh time in eight weeks, resulting in a build-up of more than 40 million barrels to US energy inventories since early-September. According to a Bloomberg News survey, traders were looking for inventories to have increased by 1.6 million barrels through the week through November 8; instead, 2.2 million barrels were added.

Crude oil prices continue to walk a tightrope, balancing concerns about supply and demand. On the demand side, traders are more optimistic that a resolution to the US-China trade war will reduce concerns over global growth. On the supply side, there are growing signs that OPEC will decline another round of production cuts when the cartel gathers next month. Failure to gain traction here by crude oil could have ramifications for the Canadian Dollar.

Relationship Between Crude Oil and Canadian Dollar Continues to Strengthen

For a currency with an economy’s whose energy sector constitutes approximately 11% of GDP, the Canadian Dollar historically has been sensitive to movements in crude oil prices. After a period of transition thanks to headlines around the US-China trade war and the Brexit deadline, we’re starting to see the historically positive relationship between energy markets and the Canadian Dollar return. The 20-day correlation between USD/CAD and crude oil prices is -0.71; one week ago, the 20-day correlation was -0.32.

Crude Oil Price Technical Analysis: Daily Chart (November 2018 to November 2019) (Chart 1)

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Crude oil prices remain trapped in their broad range since June, continuing to trade between the 23.6% and 50% retracements of the 2018 high/low range, from 50.49 to 59.61. More recently, the two-week trading range that has encapsulated price action since October 31, between 53.70 and 57.84, has proven to be the key range to watch. Today’s daily hammer candle is forming just below the two-week range high, with today’s high coming in at 57.73.

Crude oil prices are back to their daily 5-EMA, but remains above daily 8-, 13-, and 21-EMAs. Yesterday it was noted that “bullish momentum is starting to firm up – but only marginally.” Such momentum has already faded. While daily MACD continues to rise in bullish territory, it’s pace is slowing; Slow Stochastics are beginning to leak out of overbought territory. It thus still holds that traders may want wait for a break of the two-week trading range between 53.70 and 57.84 before any further decisions are taken.

Crude Oil Price Technical Analysis: Weekly Chart (December 2015 to November 2019) (Chart 2)

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The longer-term crude oil price forecast has not changed. Crude oil prices continue to trade below the rising trendline from the 2016 and 2017 lows, having carved out a symmetrical triangle since the October 2018 high. Momentum is just starting to turn higher, but remains uninspiring. Crude oil prices are once again above their weekly 8-, 13-, and 21-EMA envelope. But weekly MACD remains in bearish territory, even if it is still trending higher, and Slow Stochastics have returned to their median line. It still holds that more clarity is needed.

IG Client Sentiment Index: Crude Oil Price Forecast (November 14, 2019) (Chart 3)

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Crude oil: Retail trader data shows 42.81% of traders are net-long with the ratio of traders short to long at 1.34 to 1. The number of traders net-long is 16.63% lower than yesterday and 7.36% lower from last week, while the number of traders net-short is 64.89% higher than yesterday and 22.51% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests crude oil 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 crude oil-bullish contrarian trading bias.

USD/CAD Rate Technical Analysis: Daily Chart (November 2018 to November 2019) (Chart 4)

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USD/CAD’s winning streak is extending to five days, and 11 out of the past 13 overall. USD/CAD is pushing higher above the daily 8-, 13-, and 21-EMA envelope, which remains in bullish sequential order. Daily MACD is trending higher through its signal line, while Slow Stochastics are holding in overbought territory. USD/CAD has finally cleared the March 2019 swing low at 1.3247, where it has found selling pressure in the first half of the week. Accordingly, it still holds that “the rising trendline from the July and September 2019 swing lows comes into play near 1.3275 through the remainder of the week.”

USD/CAD Rate Technical Analysis: Weekly Chart (November 2018 to November 2019) (Chart 5)

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Nothing has changed on the weekly timeframe. “USD/CAD’s rebound in November comes after the pair found two significant support regions at the end of October. First, USD/CAD rates found support on the trendline from the 2012 and 2017 lows. Second, USD/CAD was able to turn higher from the 61.8% retracement of the 2016 high to 2018 low range at 1.3065.

With gains over the past two weeks, USD/CAD is turning above its weekly 8-, 13-, and 21-EMA envelope. Weekly MACD is just turning higher but remains below its signal line. Meanwhile, Slow Stochastics is turning higher, although remains below its median line. The longer-term bearish potential for USD/CAD remains, but is not the primary focus at present time.”

IG Client Sentiment Index: USD/CAD Rate Forecast (November 14, 2019) (Chart 6)

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USD/CAD: Retail trader data shows 38.41% of traders are net-long with the ratio of traders short to long at 1.60 to 1. The number of traders net-long is 2.27% higher than yesterday and 27.25% lower from last week, while the number of traders net-short is 3.44% lower than yesterday and 41.06% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/CAD prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed USD/CAD trading bias.

Read more: USD/CAD Jumps with BOC Rate Odds; AUD/USD Hit as RBA Cut Odds Rise - Central Bank Watch

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail at cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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