USD/CAD breaks downtrend, yet WTI prices will remain key

[MongiIG]

USD/CAD seems to have turned a corner after a pandemic-fuelled decline, but the ability to maintain this rebound also depends on energy prices.

Source: Bloomberg

 Joshua Mahony | Senior Market Analyst, London | Publication date: Wednesday 25 August 2021 

USD/CAD on the rise from long-term support

USD/CAD has been hit hard over the 14 months to June, with price dropping into the 2017 low of 1.2061.

While we did see a brief foray into fresh six-year lows in June, we have since seen the pair regain ground to signal a potential trend change.

The stochastic oscillator plays a role in that view, with the push through 20 marking an exit from oversold territory that has only happened four times since the 2007 global financial crisis. Of those four occasions, three have marked notable long-term buying opportunities.

Source: ProRealTime

 

On the daily timeframe, we can see that the pair has broken through trendline resistance, bringing an end to the bearish trend which dominated much of the pandemic.

Clearly the gains seen for crude have hit the buffers, bringing the possibility that CAD upside will be relatively limited as a result. This forms the basis for a potential USD/CAD rise as the Federal Reserve moves towards a new tightening phase.

While the pair has weakened over the past two days, this has brought us back into trendline and the 200-simple moving average (SMA) support zone. As such, bullish positions are favoured, with a decline through 1.2425 required to negate this bullish view.

Source: ProRealTime

USD/CAD a play on oil

By inverting the price of WTI oil, we can see that USD/CAD is going to be driven heavily by energy prices.

Thus, this recent recovery in USD/CAD provides a reflection of potential short-term downside for crude. With that in mind, make sure to keep an eye out for reopening/Delta sentiment as a driver of crude and USD/CAD prices.

Source: TradingView