USD CAD range trading as crude oil pressured dollar awaits Fed

Since hitting an 11-year high of 1.3352 in late August, USD/CAD has spent the past three weeks consolidating within a relatively tight trading range just below that long-term high. This consolidation has formed a clear triangle chart pattern which, if broken to the upside, could lead to a continuation of the most recent sharp uptrend that has been in place since mid-June.

Driving this uptrend for the past several months has been a combination of plunging crude oil prices, which is closely correlated with the Canadian dollar, and a strengthening US dollar that continues to price-in expectations of an impending interest rate hike in the US.

On the crude oil side, prices continue to remain depressed due to ongoing concerns with regard to global oversupply. These concerns have repeatedly been exacerbated by reports of rising inventories. On Thursday, the US Energy Information Administration (EIA) reported that US crude oil inventories increased by 2.6 million barrels to 458 million barrels last week. This was against prior consensus expectations for around a 900,000-barrel increase.

The expected negative effect of this report on crude oil prices was mitigated, however, by additional data showing that US demand for gasoline rose within the past four weeks by almost 4% over a year earlier. Crude oil ended up rising Thursday on this news, but promptly retreated again on Friday morning. Despite what appears to be healthy demand in the US, economic growth troubles in China could begin to weigh heavily on the global demand for oil.

With regard to the oversupply situation, earlier hopes for discussions amongst OPEC members and other major oil-producing countries to consider defending prices were dashed when Saudi Arabia dismissed the idea of an oil summit.

This current environment of weak oil prices has weighed heavily on the Canadian dollar, helping to prop up USD/CAD. On the US dollar side, this USD/CAD strength has been further fueled by expectations of a Fed interest rate hike that could potentially be initiated sometime this year. Next week’s FOMC meeting will be the first indication of when this rate hike may occur. Even if interest rates are not raised next week, however, the broad-based market assumption is that an initial rate hike will most likely take place by the end of this year. This expectation should continue to lend strength to the US dollar, in turn helping to propel the USD/CAD exchange rate.

Continued downside momentum for oil and upside momentum for the US dollar has the strong potential to push USD/CAD to substantially higher highs. In the event of any break above the noted triangle pattern consolidation, the immediate upside target is at the key 1.3400 resistance level. Further to the upside, the next major price objective is at 1.3600.