Canadian dollar sinking in deep oil pool 25Aug15

Canadian dollar sinking in deep oil pool

Michael O’Neill

FX Consultant / IFXA Ltd



  • China rate cut helps equities
  • Falling oil will undermine Loonie
  • USDX supports correction theory

By Michael O’Neill

The not so surprising rate cut by the Peoples Bank of China (PBoC) spurred a 320 point rally in the Dow at the open when a combination of bottom-feeders, profit takers and maybe new buyers came back to the market. That optimism hasn’t stuck to the WTI oil market where early gains have been pared back and pushed USDCAD back toward yesterdays peak.

Melt-down or temper-tantrum?

For many traders, Monday’s market madness was either a money maker or a money-taker. And for others, it was both. Gains became losses and vice versa. Every breach of a technical level attracted increasingly panicked investors wanting to protect ever-shrinking profits.

A USDCAD bear? Photo: iStock

It was a big day. FX trading and equity share volumes were through the roof as investors tried to avoid the type of losses that occurred on October 13, 2008. Ironically, their actions nearly replicated the 2008 move.

Was it a meltdown or merely a temper-tantrum? Bank on temper-tantrum. October 2008 precipitated a global financial crisis, the effects of which are still being felt (Greece, for one).

Since then, global equity indices have been slowly recovering led by US equity indices which have enjoyed healthy gains. The Dow Jones Industrial Average (DJIA) has rallied from 10,913.38 on Sept.30, 2011 to a peak of $18,351 in Feb. 2013. In that same period, the S&P500 index has gone from a low of 1,099.23 to a peak of 2,133.02.

Yesterday’s price appears to be just a correction. The 2008 financial market meltdown erased 11 years’ worth of gains in the S&P500 and 6 years’ worth of gains in the DJIA. Monday’s declines, while nasty, have merely brushed the 23.6% Fibonacci retracement level of the S&P500 index and 38.2% level on the DJIA.

Chart SPX daily

Source: Saxo Bank. Create your own charts with Saxo Trader click here to learn more

USDX says temper-tantrum as well

The US dollar index (USDX) snapped a two month uptrend with the plunge below support at 95.90 leading to a test of the long term uptrend line at 93.08 and close to Fibonacci support at 92.71. It has since bounced and is in an intraday uptrend above 93.74 with a break of 94.30 targeting 95.60. A break below 92.70 would target 90.24 and suggest meltdown rather than temper-tantrum.

Chart: USDX daily with Fibonacci

Source: Saxo Bank

Oil says meltdown

The short term outlook for oil still looks black. China’s rapidly slowing economy points to less demand for crude, yet Opec and non-Opec producers are pumping like there is no tomorrow. For many US shale producers, there may not be a tomorrow if they don’t maintain or increase production to service heavy debt loads with an ever dwindling cash flow.

Iran, soon to be unshackled from onerous UN sanctions, reportedly said it would increase production and reclaim its lost export share, even if prices remain low. Saudi Arabia would be loath to let Iran’s gains come at their expense. Its a price war – maybe.

The oil technicals are bearish. Long term, the drop below $48.23/b. represented a breach of the 76.4% Fibonacci retracement level of the entire 2001-2008 range, targeting a 100% retracement which would take WTI to $17.90/b. The intraday technicals are bearish while trading below $40.00/b with a break below Monday’s low opening up a steeper drop to $32.00/b.

Chart: USOil Weekly with Fibonacci

Source: Saxo Bank

Loonie looking lost

It is hard to find a USDCAD bear and the bears that you do find are merely skins spread out in front of a fireplace. The domestic economy is slumping and the anticipated export led recovery, championed by the Bank of Canada (BoC) has failed to materialize.

The theory is that the lower Canadian dollar would spur exports. The problem is that financial mismanagement and soaring electricity rates in Ontario have chased away those same manufacturers expected to lead the recovery. The federal election, while still just an annoyance to locals, is another uncertainty to avoid and foreign investors will do just that. Tuesday’s June GDP number may result in “recession” headlines and regardless of the actual definition of a recession, it won’t help the Canadian dollar.

USDCAD technicals.

The short term technicals are bullish while trading above 1.3080 supported by the break of 1.3203, previous 2015 high and targeting a run to 1.3450. USDCAD appears to be trading eerily similar to the first 3 weeks of August where it bounced between 1.2900 and 1.3200. This time it looks like it will be a 1.3100-1.3400 range, in the near term.

Chart: USDCAD 4 hour with uptrend line noted.

Source: Saxo Bank

– Edited by Clemens Bomsdorf

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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