USD/CAD Uptrend in Focus as Crude Oil Breaks Down

Canadian Dollar, USD/CAD, Crude Oil, Fed, Bank of Canada, Technical Analysis – Analyst Pick

The US Dollar recently closed at its highest against the Canadian Dollar since November 2020, also setting a new peak for this year. While that is something noteworthy, the Greenback’s strength has been quite broad this year. I would go so far as to say that the Loonie has been relatively resilient compared to other, less fortunate major currencies such as the Japanese Yen, Euro and British Pound.

So, why suddenly is USD/CAD seemingly shooting for the stars? The answer may lie in crude oil. As outlined in my top trade opportunity for the third quarter, bearish WTI, I believe that global monetary tightening is posing a threat to economic growth across countries. We have been seeing economists downgrade global growth expectations.

WTI is quite sensitive to these forecasts. After the Federal Reserve delivered a 75-basis point rate hike in June, oil accelerated its slump. Now, after June’s US inflation report, more aggressive tightening is likely around the corner. Oil has weakened about 25% from its peak in March, and is already down almost 9% this quarter.

This is where USD/CAD comes into play. Historically speaking, the pair tends to have an inverse correlation with crude oil, though it is not perfect – see chart below. Canada is a leading oil player. As such, the price of the commodity tends to influence economic activity, and thus monetary policy. I would argue that the reason why CAD has been more resilient this year is in part due to high WTI.

That was acting as a cushion against aggressive monetary tightening from the US. Now, with oil on the decline, this cushion might be increasingly fading. As such, the US Dollar may have some catching up to do with the Loonie. While the Bank of Canada recently surprised markets with a 100-basis point rate hike, the haven-linked Greenback could yet pull ahead if sentiment keeps deteriorating.

Are WTI and USD/CAD Inversely Correlated?

Chart Created in TradingView

USD/CAD Technical Analysis

USD/CAD broke above the critical 1.3052 – 1.3082 resistance zone, opening the door to resuming the rather slow upward push this year. However, confirmation is lacking at the time of publishing. Further upside closes would bring the 100% Fibonacci extension closer at 1.3192. Beyond the latter is the 1.3320 – 1.3421 resistance zone, which is made up of peaks from late 2020.

Keep a close eye on RSI as negative divergence is present. This is a sign of fading upside momentum, which can at times precede a turn lower. Still, the near-term rising trendline from June (red line below) could maintain the upside focus. Otherwise, key support below seems to be the 1.2820 – 1.2861 range. Falling under the latter would shift the technical outlook increasingly bearish.

USD/CAD Daily Chart

Chart Created in TradingView

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitte