EUR/CAD plunges as crude oil surges higher

No doubt, the focus of the FX market is centred on the outcome of the FOMC’s two-day meeting, due in less than one hour, which could have a major impact on the USD’s near term direction. But one other currency that has caught my attention today is the Candia dollar, which has rallied sharply. As oil is Canada’s number one export commodity, the CAD tends to follow crude prices very closely. As we reported the possibility yesterday, oil has surged some 6 per cent higher today. The rally in oil was evidently trigged by the official EIA crude stockpiles report that was published this afternoon. Although it showed another large build in commercial crude stocks, namely of 3.4 million barrels for the week ending October 23, stocks at Cushing Oklahoma, the delivery point of the WTI contract, actually fell by 785,000 barrels. What’s more, the increase was also slightly lower than expected and below the 4.1 million barrel build that was reported by the API last night. Once again, the build was driven by refineries processing less crude as many of them are still going through seasonal maintenance works. But the report also showed sharp draws in stocks of crude products, most notably distillates which fell by 3 million barrels. Gasoline stocks fell by 1.1m barrels. The report therefore suggests that demand is strong and crude stocks could start to fall as more refineries return in the coming weeks in preparation for the winter.

If oil can sustain a rally here then the beleaguered Canadian currency could storm back to life, especially against currencies where the central bank is uber dovish, such as the euro. As a reminder, the ECB president Mario Draghi delivered a decisively dovish press conference last week as he strongly suggested that the size and composition of the bond buying programme could be expanded at the central bank’s December meeting. So, the EUR/CAD could fall sharply in the coming weeks as investors prepare for more QE from the ECB and as oil prices probably head higher, in part because of short-covering.

Indeed, the EUR/CAD may have already hit a ceiling when it formed a double top reversal pattern around 1.5560 at the end of August i.e. when oil prices had their first impulsive rally. Although crude went on to fall back quite dramatically in its corrective phase, there was no such correction in the EUR/CAD, which has remained capped below a short-term bearish trend. Today, it has broken below the pivotal 1.4645 handle which had been strong support and resistance in the past. Price is currently displaying a large bearish engulfing candle on its daily chart, which points to further losses should it close around the current levels.

If the EUR/CAD continues to head lower, as we think it might, then the next stop could well be around the medium term bullish trend line which comes in around 1.4350-4400. Thereafter, there is not much significant support until the psychologically-important 1.40 handle which is some 500+ pips below here. Incidentally, 1.4000 also corresponds with the 61.8% Fibonacci retracement level of the last upswing.

If, on the other hand, the EUR/CAD rallies back above the pivotal 1.4645 handle, it will also need to break the bearish trend before the bullish trend could resume. This potential outcome appears less likely than the bearish scenario described above.

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