Friday, January 22, 2016

Crude Oil and USDCAD - What's the next move?

Crude Oil Continuous Contract (CL.F)

The price of oil has continued to fall quite drastically in recent weeks as the worldwide supply glut of oil continues to build. Non-OPEC nations such as Russia continue to pump out record supply of oil and couple this this Iran’s intention to ramp up Oil exports will only add to the oversupply. Now, we are getting new data that not only may cause the oversupply situation to increase, there are concerns that demand will wane as well. The market is growing more concerned about the worsening economic news coming out of China which could cut into the country’s crude oil demand. This might only exasperate the oversupply situation in an already bearish oil market sentiment.
In looking at the chart of crude oil, we see that it has broken a major support level of $34.85 which we have not seen since the 2008-2009 Global recession. We are now in decade long lows not seen since the mid to late 90’s. There is minor support at $27.51. Otherwise, the next level of support is the $24.44 area which we reached back in 1996. The next major resistance level can now be found at the old support level of $34.85. With an SMAX Score of 0 out of 10, Oil is showing no strength whatsoever against other asset classes.

crude oil and usdcad 844_1_20160120_360173_0_0_22799

United States Dollar/Canadian Dollar (USD/CAD)

Let’s take a closer look at the USD vs. the CAD. In a surprising move Wednesday by the Bank of Canada choosing not to cut interest rates and keeping the rate at 0.5 per cent, one would think this might provide bit of reprieve to the Canadian dollar’s recent plunge against the US Dollar as there were some market expectations the rate would be lowered. Instead, Crude Oil continued to decline in trading that has put more pressure on the Canadian dollar. Looking at the comparison chart of the USD/CAD, we see that a new leg up has ensued in continued favor of the USD. It has broken its prior resistance level at 1.4058 and it approaching its next level of resistance at 1.5072. Above that, the next level of resistance is at 1.6159, a level not seen since the early 2000’s. With a VS. SMAX score 10 out of 10 favoring the USD this potentially indicates further strength for the USD.
With the US Fed’s intention of a ”gradual move” upwards in its interest rate policy and the continued weakness in Canada’s economy with drastically falling oil prices one must be aware that Canada’s interest rates may not be raised anytime soon. This may lend additional strength to the USD. Going forward into 2016, the central banks on either side of the border may have a large influence on direction based on respective interest rate policy.


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