Oil should push Loonie higher

The correlation between the Canadian dollar and the oil markets is well-known around the FX world. This is one of the most important fundamental influences on the CAD, and at this point in time it is likely that we will see that continue to be case in the short-term. The Canadian economy is highly levered to oil pricing, as Western Canada is one of the world’s great production regions.

The set up

As WTI crude has broken above the $45 level quite decisively, it should be no surprise that we continue to see calls for the $50 level again. After all, the recent OPEC meeting had an agreement reached on further scheduling of production, and therefore it is a move away from uncertainty. Beyond that, the vaccine for Covid-19 coming suggests that we will see more growth in the global economy. While this is true for the short-term, the reality is that the recovery is going to take some time.

I would also suggest that you remember that production was far too much for demand before the pandemic, so I believe that there is only a limited time for bullish pressure. In fact, Exxon has recently suggested that pricing power is going to be strained at best. With this, I think we could see a turn around eventually, but as far as I see right now, we are trying to go higher in oil.

The trade

The trade is in the USD/CAD for FX traders. When looking at the weekly and 4 hour charts, I see that we have a range of possibilities for the USD/CAD to drop to the 1.28 level or lower. The 4 hour charts suggest that we should see fresh selling at both 1.29 and 1.30 in a bid to continue the overall downtrend. The US dollar will only completely turn around if we get a daily close above the 1.30 level. Until then, it will be more of a ‘sell the rallies’ scenario.