USD/CAD nosedives as crude oil ferocious rally accelerates

The USD/CAD pair declined by almost a percentage point as investors reacted to surging crude oil price and weak data from the US.

USD/CAD falls as oil price rise

Canada is the world’s fourth biggest producer of crude oil after the US, Saudi Arabia, and Russia. According to the EIA, the country produces more than 5.5 million barrels per day and accounts for 5% of the world total. The country consumes about 2.42 mb/d, and exports the rest.

This makes crude oil an important aspect for the Canadian economy. According to Statistics Canada, more than 200,000 Canadians work in the oil and gas sector. The industry also creates thousands of jobs indirectly.

As a result, the price of crude oil has a direct impact on the Canadian economy and the value of the Canadian dollar. On Monday through Wednesday, the USD/CAD rose by more than 1.15% as the price of crude oil declined.

The meltdown in the Canadian dollar ended yesterday, when the price of crude oil started to rise. In the past two days alone, the price of West Texas Intermediate (WTI) has moved from negative to the current $17.50. Brent, the global benchmark has bounced back from the Wednesday’s low of $16 to the present $22.

Other oil currencies are also soaring. The Norwegian krone is the best-performing currencies in the developed world today having gained by 1.50% against the USD. The Mexican peso has gained by more than 1.25%.

Why crude oil price is rising

There are several catalysts for the current surge. First, Donald Trump directed the US army to bomb any Iranian boat that threatens American vessels. Such an action would lead to geopolitical tensions, which tend to be good for crude oil prices.

Second, the president has also directed the energy department to come up with strategies to help the sector. Some of the proposals being considered are barring Saudi oil from the US, imposing tariffs on imported oil, and even paying US producers not to drill.

Third, the market believes that oil prices will recover if countries do nothing. For example, if no action is done, it would lead to the demise of many oil producers. Indeed, most shale companies are not making any money even with at the current price. Worse, these companies hold more than $250 billion in debt, which will start maturing in 2022. Therefore, a demise of these companies, while undesirable, would have positive impacts on the price of oil.

The US dollar side to USD/CAD

The overall US dollar weakness is another reason why the USD/CAD pair is falling. The dollar index, which measures the strength of the dollar, is down by more than 25 basis points.

The dollar weakness comes at a time when the US economy is ailing. On Tuesday, data showed that existing home sales data declined by 8.5% in March. Today, numbers showed that more than 4.42 million Americans signed for jobless claims. This brings the previous five-week total to more than 26 million. In a statement, Eliza Winger of Bloomberg Intelligence said:

“The latest initial claims represent the “third consecutive weekly drop from a peak of nearly 6.9 million at the end of March. While this is an important turning point, the flood of claims will likely continue.”

Early this month, the unemployment rate rose to 4.4% as the nonfarm payrolls numbers disappointed. According to Bloomberg, the unemployment could reach 20% if the current trend continues.

Shortly afterwards, numbers revealed that new home sales data dropped by 15% in March. The manufacturing and services PMI also dropped to historic lows. At the same time industrial production has dropped to lowest level since 1946 while corporate earnings have disappointed.

USD/CAD technical outlook

Looking at the daily chart, the USD/CAD pair started moving lower on March 18, when it was trading at 1.4660. It dropped and found support at 1.3851, which is slightly above the 50% Fibonacci retracement level. The pair has spent this month swinging between a high of 1.4345 and a low of 1.3816. At the same time, the price is above the 100-day and 50-day EMA. In the near term, I expect it to continue moving lower and test the 50% retracement level at around 1.3850.