Higher Crude Prices Strengthen Canadian Dollar

Higher Crude Prices Strengthen Canadian Dollar
February 28, 2019

 

The Canadian dollar strengthened against the currency of its southern neighbor mainly due to an increase in oil prices during the European session. The release of mixed Canadian inflation data pushed the USD/CAD currency pair to new daily lows. At the time of writing this article, the USD/CAD currency pair was trading at 1.3154.

 

Crude oil rally and inflation data strengthen the Canadian dollar

In the early European session yesterday, the USD/CAD pair declined as the West Texas Intermediate crude oil recorded a high of $57.39. As Canada derives a significant share of its export revenue from the shipment of crude oil, higher oil prices strengthened the Canadian dollar. The demand for oil tankers and freight rates generally reflect the oil price trend. Oil tanker rates, which remained at a low of $15,000 per day in early February, doubled last week, which implies an increase in demand, albeit for a short period.

The USD/CAD pair’s downtrend was also aided by the dovish statement made by the Fed Chair Jerome Powell regarding the interest rates. In a testimony to the Senate Banking Committee, Powell stated that the Federal Reserve is in “no rush to make a judgment” about future rate hikes. Even though Powell is optimistic about the US economy, he anticipates the growth rate to slow down mainly due to uncertainties in the US policies, volatile financial markets, and global slowdown.

Powell said: “Financial markets became more volatile toward year-end, and financial conditions are now less supportive of growth than they were earlier last year. Growth has slowed in some major foreign economies, particularly China and Europe. And uncertainty is elevated around several unresolved government policy issues, including Brexit and ongoing trade negotiations.”

The loonie gained further after Statistics Canada released the Canadian CPI report for January. The inflation report indicated that the consumer prices rose 0.1% in January, but the core CPI fell to 1.4% from the prior figure of 2%. Analysts had expected a value of 1.5%. For the second time in the past year, inflation dipped below the Bank of Canada’s target rate of 2%. Since July 2017, the Bank of Canada has raised its rate five times. The central bank Governor Stephen Poloz stated that the interest rates should go up further into a neutral range.

Commenting on the inflation, Paul Ferley, assistant chief economist at the Royal Bank of Canada, said: “With the core measure of inflation within the central bank’s range, the Bank of Canada is likely to remain on the sidelines and continue to monitor the data.”

The crude oil rally and the mixed economic data from Canada are expected to keep the USD/CAD pair range bound with a slight bearish bias in the days to come.

The historical price chart indicates that the USD/CAD pair has started declining after facing resistance at 1.3310. The next major support exists only at 1.2910 levels. Additionally, the MACD indicator’s reading is also in the negative region. As a result, we can anticipate the currency pair to move down in the short-term.

CAD - technical analysis - 28th February 2019

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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