Loonie’s Wings Will Get Clipped

Background:  USDCAD has declined rapidly following the November 30th Opec agreement to reduce production by 1.2 million barrels per day.

WTI Oil prices climbed from $45.50/b to $52.40/b in less than a week.  USDCAD declined from 1.3460 to 1.3235 in the same period.

A key observation is that despite the WTI rally prices have not broken above the long-term downtrend line which comes into play in the $53.50-60 area. The Dec. report that Opec pumped a record 34.4 mb/d means that at that level, even their 1.2 mb/d production cut wouldn’t be enough to get Opec production below their target ceiling of 32.5 mb/d.

Domestic oil production is major part of Trumps energy policy and US Shale producers have demonstrated a knack for extracting efficiencies in production as well as oil.  Many US producers are profitable above $50.00/b

It stands to reason that the existing oil glut will remain a factor for a good part of 2017, limiting oil price upside.

USDCAD downside is limited by domestic issues as well.  The Bank of Canada has a doveish bias as evidenced by the October admission that the BoC discussed cutting interest rates.

Donald Trump’s hostility toward NAFTA is a potential medium term negative and will provide support to USDCAD

US interest rates are going higher next week. In addition, Trump’s infrastructure spending plans are expected to stoke inflation which if correct, could force the Fed to raise rates faster and higher than originally expected.

                                                      TRADE IDEA PARAMETERS     

BUY:  ½ normal position size at market (1.3295), Balance at 1.3255

STOP LOSS:  1.3127 offered

TAKE PROFIT:   1.3450

TIME HORIZON   5 days

                                                           TRADE MANAGEMENT

The risks to this trade are many.  A rise in oil prices above the recent high would trigger the stop. A less doveish than expected Bank of Canada statement on Wednesday December 7 would also trigger the stop.  It is also vulnerable to extended US dollar weaknes against the majors.

TECHNICAL OUTLOOK

 The intraday USDCAD technicals are bullish while trading above 1.3235-50 area which is also a strong support area stretching back to the end of October.  A move above the 1.3370 area would suggest that a short-term bottom is in place (1.3235) and target another test of the 1.3588, mid-November peak.

Chart: USDCAD 30 Minute

6dec16-usdcad-30-min

USDCAD daily with recent trading band and 100 day moving average noted

6dec16-usdcad-4-hr-ti

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