Ms. Loonie finally made a turn against the US dollar after three months of full-on drops, which on the forex dance floor appeared as up-moves in the USD/CAD pair. Is this the beginning of a new downtrend for the pair? Here is a look at the fundamentals, technicals, and the Invest Diva Diamond altogether.
1- Oil Drama Ain’t Over Yet
While a new report from IEA indicates that the market is slowly moving back into supply and demand balance, Black Gold saw low levels that hadn’t been seen in over a decade beginning of January, 2016. The dip now seems like it’s taking a rest from sliding down, and it could have to do with recent cold weather in some countries in the Northern hemisphere. However, taking a look at the fundamentals and the technicals of oil prices versus the USD, the oil drop could continue for a bit longer. The global over-supply remains in full force, with Iran joining the gang of sellers. Iran’s Oil Minister Bijan Zanganeh recently said that they can immediately sell 500,000 barrels per day and could even bump daily production up to 1,000,000 barrels by the end of the year. Not to mention the gloomy market sentiment which could sometimes be even stronger than data. Add these to the low demand forecast from OPEC, and China’s economic slowdown which is still weighing on global market activity, and you’ll get the recipe for lower oil prices: High Supply and Low Demand.
Furthermore, taking a look at the USD/WTI monthly chart going back to the 1999, you’ll notice a double top chart pattern that has just been broken below the neckline… Bringing the oil’s support level to at least $20 before recovering.
And yes, we could expect an oil price recovery by the end of 2016.
What does this have to do with the Canadian dollar? For my Baby Invest Divas, let me explain that the Canadian dollar (Also known as Ms. Loonie, CAD) is impacted massively by oil prices because of its positive correlation to it. A large part of Canada’s US dollar income comes from the sale of energy-based goods to the rest of the world and to the USA in particular. No wonder Ms. Loonie has been on the same roller coaster ride as oil in the past few months!
And therefore, if the oil slump continues, so will the Loonie slump.
2- Canada’s Got Trouble with Inflation – GDP Coming Up
Thanks to weak Ms. Loonie, Canadians now have less spending power. And that has led to sharp inflation in the price of imported goods, including a year-on-year increase of 3.7 per cent in the cost of food. And needles to say,Bank of Canada (BOC) is worried about that. However in his previous statement, BOC’s governor Governor Stephen Poloz and his gang surprised the markets when they decided keep interest rates steady at 0.50%, which led to CAD strength.
As you might remember from the Invest Diva’s Video Course, central banks try to monitor their expanding inflation by cutting interest rates. But Governor Poloz wants to take it slow with Ms. Loonie and avoid further stress in her already stressful days thanks to oil. Poloz also tried to bring spread some positivity by saying said that weak Ms. Loonie as well as strong demand from the U.S. will help Canada’s economy shift to non-resource-related activities.
With this, all eyes will be on Canada’s GDP this Friday which is predicted to edge higher. If the data comes in worse than expected, we could expect Ms.Loonie to pack her bags and restart on her downfall journey.
3- FOMC Statement Could Also Trigger the Pair
With the whole Chinese drama in the past couple of weeks, the US dollar lost his “leading power” in the currency pair dance moves, and was basically dragged around by other currencies. Now he has a chance to shine again with the FOMC Statement coming up on Wednesday at 7 PM GMT during the New York session.
While the Fed isn’t expected to make any changes to its policies, investors will be scanning its statement for any signs that the weak inflation is delaying the Fed’s rate hike schedule. A big downer was last Friday’s headline and core CPI numbers that had already missed their estimates.
With this, any negative signal could push the USD/CAD pair lower, while a positive indication to more rate hikes could trigger an up-move.
This week’s USD volatility won’t end with the FOMC statement, as we also have the Unemployment Claims on Thursday at 1:30 PM GMT, followed by the Quarterly GDP on Friday at 1:30 PM. Any bad news could delay the USD/CAD recovery.
4- Technically Speaking
Even with the recent drops, the USD/CAD pair still remains way above the Ichimoku cloud, and is currently supported by the 23% Fibonacci retracement level at 1.41. The next supports are set at 1.39 and 1.37, which could be reached under the following conditions:
– Negative or blah US economy data
– Oil news including less supply and more demand
– Positive Canadian GDP and other economic data
Zooming back on the monthly chart all the way to 2003 however, you’ll notice that the Double Bottom pattern is yet to be completed, and we could see long term hikes as high as 1.45 and 1.50 in extension.
So, will USD/CAD move back up? The short answer is: It is very likely. We could see further drops to 38% or even 50% Fibonaccii levels at 1.39 and 1.37, but with the above fundamental and technical outlook, this could merely be a pullback after months of restless hikes.
If you are a long term trader, you could consider getting in a buy position at any of the support levels, and looking to reach your targets at 1.45 and above. Otherwise, you could ride on the current bearish market sentiment and make some short term pips on that. The remaining of this week could create a ton of volatility which increases the trading opportunity and risk equally. So if you have low risk appetite, you may want to at least wait until the FOMC statement is out, before making a trading decision.
In any case, set your stop loss and profit targets a little loose from the levels I have mentioned below, because the naughty currency pairs sometimes change their mind right before a psychological level just to piss the forex trading crowd off. This technique helps you avoid getting kicked out of your trading position prematurely.
Here are the recommended supports and resistance levels* for short term USD/JPY forex trading strategies:
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*Important Note: The support and resistance levels are not suitable for all traders and largely depend on your account size, margin and leverage. Book a private lesson to learn how to personalize your account based on our trading guide.