Traders are a funny breed and oil traders appear funnier than most. From April to June, the mere prospect of the possibility of an H2'16 global economic rebound was enough for them to ignore the reality that the market remained oversupplied. WTI rallied from $35.23 to $51.40/barrel even as the Energy Information Administration's weekly crude stocks change report reflected elevated inventories.
June 2016 crude stocks were 5.7% higher than they were in June 2015.
But that was then. WTI declined almost daily throughout July. Traders became concerned that US stocks were not declining even though it was the “summer driving” season, the time of year when gasoline inventories are traditionally depleted. That wasn’t happening.
The International Monetary Fund trimmed global growth forecasts by 0.1% for 2016 and 2017 and even though the downgrade was minuscule, it got them nervous. The Federal Open Market Committee delivered another ambiguous statement, US rig counts were rising, and there were fresh concerns of increased supply from Iran and Iraq.
August kicked off and Saudi Arabia was going Wal-Mart on the industry, cutting the price of Arab Light below the Asia benchmark.
The WTI technicals are bearish. The decline from June 28 remains intact while prices are below $43.82/b. The target is the 50% Fibonacci retracement level of the February-June range of $35.76/b.
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Source: Saxo Bank
CAD's on-again, off-again affair with oil
The Canadian dollar and WTI oil usually go hand-in-hand, except when they don’t... and this is one of the times when they don’t. WTI has slid steadily for the past 10 days and that slide coincided with USDCAD gains, but only for the first half of the move.
Since last Wednesday, general US dollar sentiment and a dash of month-end selling has driven USDCAD lower, even as WTI declines. It won’t last – it never does.
The only significant Canadian data, the unemployment report, isn’t released until Friday and that report will take a back seat to the US nonfarm payrolls report. Prior to that, Wednesday’s EIA crude stocks report could be key. A larger-than expected build in inventories could crush WTI, which would reinforce support for USDCAD in the 1.2950-1.300 area.
USDCAD and WTI:
Greenback vulnerable according to USDX
US dollar bulls may have tossed in the towel for the short term – at least that’s what the US dollar index is suggesting. The USDX rally from June 23 ended with the move below 97.10 last Wednesday. The subsequent breaks of 95.86 and then 95.32 which represented the 38.2% and 50% Fibonacci retracement levels of the June 23-July 25 range now target the 61.8% level at 94.78.
The Canadian dollar has been a laggard. The rest of the G10 currencies have made decent gains against the greenback while USDCAD losses are almost reluctant. You can thank the major crosses for that.
GBPCAD not helping loonie gains...
The post-Brexit plunge in GBPUSD gave the loonie a little nudge due to GBPCAD sales. Since bottoming out at 1.6970 on July 7, GBPCAD has traded within a 1.7000-1.7450 band.
Making matters worse for the Canadian dollar, GBPCAD is in a modest uptrend while trading above 1.7220 and is targeting a topside test which if it breaks, would extend gains to 1.7600.
...and neither is EURCAD
EURCAD has bounced within a 1.4250-1.4575 range since June 24 with a lot of noise within that range. The topside was broken at the end of the month and EURCAD extend the gains to 1.4690 before retreating.
The EURCAD uptrend remains intact while prices are above 1.4550 which keeps the focus on a test of 1.4730.
Down under down on loonie as well
AUDCAD has been rallying since May 27 and even the 0.25% rate cut delivered by the Reserve Bank of Australia overnight has failed to snap the uptrend. A break of resistance at 0.9960 representing a quadruple top since April 18 and the 76.4% Fibonacci retracement of the 2016 range will extend gains to 1.0150.
Meanwhile, the kiwi rally has been relentless and is probing levels last seen in May 2015.
The US dollar is under pressure across the G10 spectrum. The weak GDP report on Friday, weak ISM Manufacturing report on Monday, and cautious-sounding Fed speakers have combined to squeeze US dollar bulls, giving new life to USDCAD bears.
Nothing lasts forever
Will it last? Check back on Friday. Another 200,000-plus nonfarm payrolls report will turn today’s dollar bulls into Friday’s hamburger. That also means that USDCAD will be back testing 1.3200.
In the end, it may not come down to crude but to the speed of the US recovery. Photo: iStock
— Edited by Michael McKenna