USD/CAD drops 0.5% in the open on expected surge in oil prices

While CAD was the notable underperformer in the G10 space, slipping -0.5% to 1.328, the currency has opened strongly at the start of the week sending Funds down some 0.5% to a low of 1.3216 on news of facilities at the Abqaiq and Khurais oil fields being attacked which has cut Saudi Arabia’s oil capacity in half becomes the major focus and likely to see oil prices surge higher.

An attack on Saudi Arabia’s key oil facilities has significantly raised tension in the Middle East with Houthi rebels in Yemen reported to have launched a fleet of drones on Saturday.

"The heightened geopolitical risk should override market concerns about weaker demand for the foreseeable future," analysts at ANZ Bank explained:

"The timing of this attack is no accident. It comes only a week after Saudi Arabia’s appointment of Prince Abdulaziz bin Salman as Energy Minister and shortly after news of a restart in initial public offering of Aramco."

"We expect the market to quickly price in a sizeable geopolitical risk premium. Any expectation that the market had about the US easing sanctions on Iran following President Trump’s dismissal of John Bolton will quickly dissipate. This should see Brent crude test the US70/bbl mark in the short term. Any further upside will depend on the length of the disruption."
 

Fed and Candian data in focus

Meanwhile, the Loonie will be in focus this week with Retail Sales as well as inflation data on tap where headline inflation is expected to creep lower to 1.7% y/y as weaker gasoline prices contributed to a 0.3% m/m decline. "Airfares will add another source of downside on a partial correction of the 14% gain in July, while the Bank of Canada's core measures are expected to hold at 2.0% y/y on average," TD Securities.  As for the Dollar, the Federal Reserve interest rate decision is priced in with markets expecting the central bank to lower rates by 25bp again next week and leave the door open to further easing. 

USD/CAD levels

For a technical perspective, Funds has fallen to the 50 and 21 4-hour moving average convergence which guards a run back to the 50% line of the July-September range at 1.32 the figure. The 61.8% Fibonacci target comes in the 1.3150s ahead of the 200-day moving average and confluence of a 23.6% Fibo.