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USD CAD rebounds from key support as crude oil retreats

Article By: ,  Financial Analyst
February 23, 2016 6:46 PM

After having rallied sharply on Monday, crude oil prices retreated on Tuesday due in part to market skepticism over the adequacy of a proposed OPEC/non-OPEC crude output cap. This retreat was intensified after Saudi Arabian oil minister Ali Ibrahim Naimi commented on Tuesday that despite best efforts to reach an agreement on freezing oil output at January levels, major oil-producing countries would not be seeking actually to cut production.

This declaration further disappointed oil traders who had already harbored doubt that any limited action by oil producers, like a coordinated output cap, would simply be inadequate to alleviate the massive oversupply situation and support plunging crude oil prices.

The resulting slide in crude on Tuesday pressured the Canadian dollar, as it typically does due to Canada’s reliance on oil-related exports. This drop in the Canadian dollar coupled with a relatively flat US dollar prompted the USD/CAD currency pair to bounce off of key support around the 1.3650 level.

For more than a month, USD/CAD has been in retreat from January’s new 12-year high above 1.4600 resistance. This sharp drop has been prompted largely by a pullback in the US dollar combined with some stabilization of crude oil prices near their multi-year lows. By early February, the currency pair had dropped down to establish a support area around the noted 1.3650 level, and has been unable to breach that level since, despite several attempts. This 1.3650 level is also at the 38% Fibonacci retracement of the bullish trend that runs from the 1.1900-area lows in May of last year all the way up to the noted 12-year high above 1.4600 in January.

Could this mean that USD/CAD’s pullback may be over and we might expect a rebound to continue the entrenched bullish trend? Again, it comes back to the near-term future of crude oil prices. If crude continues to slide due to the inadequacy of actions meant to alleviate oversupply conditions, USD/CAD could well rebound back above 1.3800 and towards the major 1.4000 psychological level once again. Any further move above 1.4000 could then begin to target 1.4200 resistance. In the somewhat less likely event of a major rebound in crude oil, however, any corresponding USD/CAD breakdown below the noted 1.3650 support area should find further downside support around the key 1.3400 level.

 

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