USD/CAD down but not out: drop in oil could support Loonie

Oil prices jumped then dumped in the immediate reaction to the official Energy Information Administration’s (EIA) crude stockpiles data earlier today. Despite a big drawdown in the headline inventories figure, the EIA numbers were very much similar to those reported by the American Petroleum Institute (API) yesterday. Oil prices fell despite the fact crude stocks declined by 8.9 million barrels last week which was the biggest draw since September 2016. But the good news ends there. Stocks of crude at Cushing rose, while those of oil products including gasoline and distillates also climbed. What’s more, US oil production increased to its highest level since July 2015. So, nothing has changed fundamentally, which means all else being equal oil prices should struggle to go higher. This is potentially bad news for the Canadian dollar, with Canada being a large oil exporter. If oil prices remain low, then this may halt the USD/CAD’s drop. This pair was sharply lower at the time of writing, mainly in response to the earlier rise in oil prices, and weakness in US housing market data. Housing starts fell 4.8 percent in July while building permits declined 4.1 percent, both missing expectations. But with oil falling again, the USD/CAD could rebound. Minutes of the FOMC’s last meeting will be released later and if they convey anything hawkish then that could accelerate the potential rebound.

At the time of this writing, the USD/CAD was below yesterday’s low (1.2720), trading near 1.2700 support level. On the face of it, today’s price action is bearish. However, recent bearish price action has seen little follow-through to the downside, which is a characteristic of a bullish market. So, if the USD/CAD were to reclaim yesterday’s low at 1.2720 then it would suggest that the sellers are trapped again and price may then go to where their stops will be resting. The most obvious location would be above resistance and today’s high between 1.2750 and 1.2770. A potential break above this area may then pave the way for a move towards the next resistance around 1.2860-1.2940, an area which was previously support and where we have the 50-day moving average converging with the 38.2% Fibonacci level. That being said, if the USD/CAD breaks below the key 1.2655-1.2700 support area then this would invalidate the short term bullish bias. In this case, a potential drop towards the next support level at 1.2575 would not come as a surprise to me. But overall, the technical outlook appears more bullish than bearish in the short-term, especially after the formation of that potential reversal pattern (false break) against last year’s low at 1.2460, at the end of July.