USD/CAD: Watching black gold - Rabobank

According to Christian Lawrence, Senior Market Strategist at Rabobank, the key factor pushing USD/CAD lower since 5th May has been the 16% rally in oil prices

Key Quotes

“The break above 1.36 in USD/CAD happened at the end of April pushing the pair into yet another 2 cent range of 1.36-1.38. This of course represented a break of the broader 6 cent range of 1.30-1.36 that dominated price action since September of last year. As we had alluded to previously, the break of 1.36 ushered in a test of 1.38 with an intra-day high of 1.3793 hit on May 5th. Subsequent price action has seen USD/CAD fall back into the 1.345-1.36 sub-range that dominated for so long. This move came as USD edged lower throughout May with only a hand full of high yielders outperforming the greenback. This was not the only driver.”

“A modest dip in June rate hike expectations in the US following weak CPI and retail sales data helped from an interest rate differential perspective although the relationship between USD/CAD and short end rates has diminished of late. To our mind, the key factor pushing USD/CAD lower since 5th May has been the 16% rally in oil prices. Although correlation does not imply causation, the link between oil prices and CAD is well established and the three month rolling correlation of daily % changes between oil and USD/CAD has risen to levels not seen since mid-2016 at 0.63%.”

“Looking forward, given the role of interest rate differentials and oil prices we would argue that the main event for this week is not actually the Bank of Canada rate decision but instead it is Thursday’s OPEC meeting which has the potential to drive oil prices in the short term. From this respect, it is fair to say that an extension of production cuts into next year is already priced in and anything short of that would likely drive oil back into the 40s and see USD/CAD test the 1.38 handle.”

“Conversely, if we see an announcement above and beyond a short extension then the rise in oil prices could push USD/CAD back into the 1.32-1.345 sub-range. We expect neither surprise to materialise and see Thursday as likely to be relatively neutral for oil prices and we favour USD/CAD heading back up towards the 1.36 handle in the coming weeks.”