USD/CAD rallies above 1.2600 level as USD grinds higher, crude oil prices tank

  • USD/CAD has rallied to the north of the 1.2600 level in recent trade to hit fresh weekly highs.
  • A combination of USD strength and crude oil price weakness is behind the move.

USD/CAD has rallied to the north of the 1.2600 level in recent trade to hit fresh weekly highs. That means that after a day of trying, the pair has been able to break convincingly above its 21-day moving average, which currently resides in the low 1.2570s.

Short-term USD/CAD bulls are likely now targeting a test of the 50DMA at 1.2656 over the next few sessions, only about another 40 pips higher from current levels, which isn’t that much of an ask given the pair has already recovered over 70 pips from session lows in the 1.2540s to current levels in the 1.2610s. On the day, USD/CAD trades with gains of about 0.4% or roughly 50 pips.

Driving the day

Two main factors are driving the USD/CAD higher on Thursday. Firstly, the pair is deriving support from an ongoing recovery in USD, which appears to be garnering support amid defensive market tone as markets fret about rising Covid-19 cases and lockdown in Europe and other key emerging economies, as well as amid rising West versus China and Russia tensions (sanctions have been being thrown all over the place this week).

Secondly, the loonie’s woes are being worsened by a sharp correction lower in crude oil prices, which have now all but erased Wednesday’s gains (WTI is trading back in the low $58.00s, down nearly $3.0 or around 4.5% on the day); positive impulse from the news of the Suez Canal blockage appears to be waning as markets refocus their attention on the worsening outlook for crude oil demand in Europe; according to Rystad Energy analyst Bjornar Tonhaugen, “if Europe was in a better state in its COVID-19 battle, then the disruption would possibly create a more prolonged issue but this is not the case… That is why traders today quickly corrected some of the previous day’s gains”.

In terms of the latest regarding the Suez blockade; the Suez Canal Authority says that eight tug boats are currently working to move the 400M long container ship currently blocking transit in both directions in the canal. Peter Berdowski, CEO of Dutch company Boskalis, the company that operates the tug boats, said that “we can’t exclude it might take weeks, depending on the situation”.

But with most major EU nations heading back into some form of relatively strict lockdown to contain increasing Covid-19 infection, hospitalisation and death rates (the widely touted “third wave” of the virus in the EU) and the bloc’s vaccine rollout still lagging compared to the likes of the US and UK, demand for crude oil in Europe in the coming months (which happens to be the destination for most of the crude oil tankers attempting to transverse the blocked Suez Canal) is likely to take a hit, which will likely offset any temporary supply disruption. There are also growing concerns about the direction of the pandemic in key emerging market economies; newly recorded cases in Brazil and India are at record highs, with the latter increasingly moving towards vaccine nationalism and threatening to block AstraZeneca vaccine exports.

Looking ahead, the main driver of crude prices (and, by extension, the loonie) next week will be the OPEC+ meeting on 1 April (next Thursday). As noted above, recent higher than usual levels of crude oil market volatility might well continue heading into the meeting as various OPEC+ sources leak the varied viewpoints of cartel members going into discussions; most agree that another hike in output at this point is unlikely given 1) the above-mentioned demand concerns in Europe and elsewhere and 2) the recent sharp drop in prices from monthly highs (WTI currently trades more than 13% below its March high of just under $68.00) – OPEC sources said on Wednesday that a rollover of current production levels is the most likely outcome.

 

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