The Greenback vs The Loonie
The USD/CAD Pair Has Bulldozed Its Way into May – but Where to Next?
The Manhattan skyline for the USD/CAD pair is an interesting one. This currency pair has been range bound since the November 8 presidential elections, trading between 1.2967 on the low end and 1.3697 on the high-end. That represents a 5.62% fluctuation from the low price. As one of the more stable currency pairs in the world, the USD/CAD typically fluctuates around commodities like crude oil prices on the Canadian end, and Fed interest rate decisions, the DXY, and economic data releases on the US end. This oversimplification of the USD/CAD is a good starting point for binary options traders wanting to gain some insight into the pair’s volatility.
Is USD Strength Undermining the CAD?
Judging from the above chart, the prevailing exchange rate of 1.3673 is well above the 50-day moving average of 1.338 and the 200-day moving average of 1.325. This indicates dollar strength. To confirm this, let’s look at the US dollar index. Over the past 5 days, the DXY (US dollar index) has appreciated by 0.24%. On 25 April 2017, the DXY was trading at 98.84, and by 2 May 2017, it was up at 99.08. This marginal gain typically plays into the hands of dollar bulls when trading the USD/CAD pair. We can see this by the appreciation in the currency pair. However, for the year to date the DXY is down 3.23%, which contrasts slightly with the performance of the USD/CAD.
Part of the reason that the CAD has had a rough time of late is the price of oil. WTI crude oil prices and Brent crude oil prices directly impact the Canadian dollar, otherwise known as the loonie. The Canadian economy is heavily reliant on commodity prices like crude oil. Otherwise known as black gold or even black crack, crude oil is the lifeblood of Canada. According to stats, Canada exports 3 million+ barrels of petroleum and/or crude oil to the US alone per day. 85% of Canadian exports flow to the US, and so US demand for Canadian products plays directly into the hands of the strength/weakness of the CAD.
Between 2000 and 2016 the USD/CAD pair was negatively correlated with the price of crude oil. In other words when the oil price depreciates, the USD/CAD pair appreciates, and when the oil price appreciates, the USD/CAD pair depreciates.
Important Tip for Traders of the USD/CAD PairAs a trader, you will always want to check the oil price when trading the USD/CAD pair.
Where is the USD/CAD Pair Headed this Week?Over the past week, the USD/CAD pair has gained ground over multiple successive sessions of trading. This currency pair is technically trading around 14-month high levels, and could continue to do so into the foreseeable future. There are many factors that influence the USD/CAD, including the prospect of renegotiating NAFTA, the Keystone pipeline project, crude oil prices, and general macroeconomic data releases in the US and Canada. According to President Trump, he is willing to renegotiate NAFTA to gain a more favourable deal for the US but if that falls apart he has no hesitations about withdrawing from NAFTA completely.
Crude oil prices have also been trading rather weekly, around the 200-day moving average. This indicates that the short-term perspective on crude oil is certainly not bullish. The net short position among non-commercial traders for the CAD was $3.14 billion by April 25, 2017. This indicates an increase of $657 million in short positions.
If NAFTA remains in place, and oil prices stabilize and rise, the CAD will certainly turn the corner on the USD.