USD CAD extends gains on falling oil Bank of Canada outlook

USD/CAD surged on Wednesday as crude oil extended its losses on a larger-than-expected inventory build, and the Bank of Canada issued a dovish statement as it kept interest rates unchanged at 0.5%. The rise for USD/CAD, which pushed the exchange rate above 1.3100 in active trading on Wednesday, was driven by a substantial drop for the Canadian dollar due to the abovementioned factors, and it extends the rebound for the currency pair that has been in place for nearly a week.

The further drop in oil on Wednesday, which placed substantial pressure on the Canadian dollar, was prompted by weekly data from the US Energy Information Administration, which reported that commercial crude inventories in the US increased by 8 million barrels last week against prior expectations of a 3.5 million barrel increase. This data follows a report from the American Petroleum Institute, which estimated a build of 7.1 million barrels. These data points have led to progressively increasing concerns over the persistent oversupply situation, pressuring the West Texas Intermediate benchmark for crude oil below the $45.00 mark at one point on Wednesday.

Adding to this pressure on the Canadian dollar, the Bank of Canada kept its key overnight lending rate unchanged at 0.5%, as broadly expected, but also downgraded its economic growth outlook partly as a result of low oil and commodity prices.

The past week’s rebound for USD/CAD has lifted the currency pair from close to a major support level at 1.2800. This support level has been an important point of demarcation since the beginning of the year, serving initially as resistance and then as support once the level was broken to the upside in mid-July. Prior to the current rebound, USD/CAD spent the first half of October in a sharp pullback from September’s 11-year high of 1.3456.

At the moment, there appears to be no end in sight for crude oil’s oversupply issues, especially with the specter of Iranian sanctions being lifted and Iranian oil potentially flooding an already glutted market in the near future. Low oil prices should also continue to foster a dovish outlook from the Bank of Canada for the foreseeable future.

These factors affecting the Canadian dollar should help to support USD/CAD going forward, even as the US dollar fluctuates on continuing speculation over the timing of a Fed rate hike. With further upside momentum on the current rebound, the next major target to the upside is at the 1.3200 resistance level, with a further bullish target at the 1.3400 resistance level – slightly below September’s noted 11-year high.

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