USD/CAD bullish divergence forms near its 3-year low

Written by: Crispus Nyaga
January 13, 2021
  • The USD/CAD pair is hovering near its lowest level in April 2018.
  • The trend is partly due to the overall higher crude oil prices.
  • With a bullish divergence forming, the pair could bounce back in the near term.

The USD/CAD pair is under pressure as forex investors react to the rising crude oil prices. It is trading at 1.2728, which is the lowest it has been since April 2018.

The USD/CAD has been on a sharp downward trend

High oil prices boost the Canadian dollar

Canada is a leading crude oil producer. The country produces more than 3.8 million barrels of oil every day, making it the fourth-biggest producer after the United States, Saudi Arabia, and Russia.

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Therefore, traders view the Canadian dollar as a proxy for crude oil prices. Indeed, the currency reached a multi-year low last year when oil prices turned negative. 

In the past few months, oil prices have been on an upward trend due to the rising global demand and the weaker US dollar. Yesterday, the price of Brent and West Texas Intermediate (WTI) rose to an 11-month high. 

This performance is because of the falling US inventories and the upcoming voluntary cuts by Saudi Arabia. Brent is trading at $56 while the WTi is at $53.

Crude oil price
Crude oil price has been rallying

The USD/CAD pair is falling even as the US dollar rallies. The dollar index is up by more than 0.20% partly because of the expectation of a stronger US rebound. 

Analysts believe that the US economy will recover faster due to the vaccines and stimulus. In fact, Joe Biden will deliver a speech about his stimulus plans tomorrow. The plan could allocate up to $3 trillion to the American economy, which will help stimulate growth. As a result, this will force the Fed to hike interest rates and taper asset purchases. 

Meanwhile, the USD/CAD is falling even as Canada continues to battle the current wave of the virus. The country confirmed more than 6,200 cases yesterday, bringing the total to more than 674,000. Deaths have increased to more than 17,000.

USD/CAD technical outlook

USD/CAD technical chart

The USD/CAD pair has been in a strong downward trend in the past few months. On the daily chart, it has moved below the 50-day exponential moving average. This is a sign that bears remain in control. 

However, a bullish divergence pattern is happening. This is evidenced by the Relative Strength Index (RSI) and the MACD. Also, the pair has formed a double-bottom pattern. Therefore, while the overall trend remains bearish, the pair could bounce back in the near term. If this happens, it could test the resistance at 1.3000.