Article / 26 July 2016 at 23:04 GMT

USDCAD: Oil in driver's seat while the Fed co-pilots

FX Trade Strategist /
  • FX traders are suffering from pre-FOMC jitters
  • US data does not preclude a hawkish FOMC statement
  • Falling oil and a rising dollar is a bad combination for the loonie

By Michael O'Neill

It has been a sweltering couple of weeks over large swathes of the northern hemisphere and we haven’t even hit the half-way mark of summer. WebMD lists dizziness, rapid heartbeat and behavioural changes such as confusion as symptoms of heat stroke.

 Who's flying this plane? When it comes to the loonie, oil is in charge. Photo: iStock

Those same symptoms have been seen in FX markets, with USDJPY in particular. Two weeks ago, USDJPY was probing support in the 100.00 area. The big question was how far it could fall before it triggered Bank of Japan intervention. That changed with Japan’s Upper House election. Prime Minister Shinzo Abe’s Coalition won a “super majority” and he immediately announced a new round of fiscal stimulus measures. USDJPY embarked on a nine-day rally that ended at 107.50 helped by stories of bigger-than-expected spending.

And then, heatstroke. USDJPY plunged. Dollar bulls apparently remembered how the FX market reacted in January when the Bank of Japan announced negative rates and feared that the expected next round of BoJ stimulus would have the same result.

Oil traders were out in the sun as well. Weekly draw-downs of crude stocks as reported by the Energy Information Administration had many believing that the earlier price declines were merely position adjustments and not evidence that the supply/demand imbalance was still an issue. That belief is evidence of heatstroke considering that WTI is currently sitting at $42.56/barrel.

The loonie is not the master of its destiny

There is a lot to like about the Canadian dollar but you wouldn’t know it from the recent price action. If USDCAD traders were to be believed, the only thing that Canada has going for it is oil and since oil is dropping, so should the Canadian dollar.

Those traders are wrong. There is more to Canada than oil.

Aside from the oil patch, the Canadian economy is more than holding its own. The improving outlook for the US economy, the destination of close to 75% of all Canadian exports, bodes well for the domestic economy. The Bank of Canada is forecasting 3.6% Q3 GDP growth and last week the province of Ontario (largest by population) reported 3% GDP growth. 

Consumers are spending. May retail sales rose 0.2%, slightly above expectations. Inflation gained as well. The ever-present housing market bubble concerns may alleviate, to a degree, thanks to a new foreign buyers' tax that kicks in August 2. Foreign buyers of residential real estate in the Greater Vancouver area will be levied an additional 15% property transfer tax.

But it doesn’t matter. Oil is in the driver’s seat and the Fed is its co-pilot.

Aside from oil, the other major driver of USDCAD direction is the US interest rate outlook. Wednesday will provide more clues when the Federal Open Market Committee statement is released. An MNI news article recapped comments from various Fed members since the last meeting which suggests a rather undecided committee. A June rate hike appeared to be a ”done deal” until Brexit and a lousy labour report derailed the view. Since then, the June nonfarm payrolls report completely erased the taint of the May report and the immediate Brexit fallout has been contained.

A hawkish FOMC statement in the present environment of declining oil prices warns of a much higher USDCAD.

USDCAD technicals-highway to the danger zone

Oil prices are threatening to break below key support at $42.35, which would lead to a test of $40.0 while USDCAD is probing resistance in the 1.3240 area. That’s a dangerous mix for the loonie. In addition, 1.3285 is setting up to be the line in the sand. A break above that level suggests additional gains with 1.3650 as a stretch target. Only a move below 1.3065 would negate the topside pressure.

USDCAD and oil
 Source Saxo Bank. Create your own charts with SaxoTrader; click here to learn more 

– Edited by Gayle Bryant

Michael O'Neill is an FX consultant at IFXA Ltd. Follow Mike or post your comment below to engage with Saxo Bank's social trading platform.


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer
- 沪ICP备13028953号-1

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail