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Vladimir Zernov
USD/CAD

Weaker Oil Prices Have More Impact on USD/CAD Than Weaker U.S. Dollar Index

The Canadian dollar got temporary boost after the U.S. Federal Reserve announced its new unlimited quantitative easing program, but lower oil prices quickly put pressure on the Canadian currency.

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The big problem for the Canadian economy at current low oil prices is that Western Canada Select oil trades at a very substantial discount to WTI oil. While the WTI oil is above $22 per barrel, the Western Canada Select oil is in the sub-$10 area.

Thus, any additional pressure on WTI pushes Canadian oil closer to zero, creating more downside for the Canadian currency. The impact of lower oil is especially visible today, because the U.S. dollar is losing ground against the broad basket of currencies following the Fed’s announcement.

The U.S. Dollar index has once again failed to cross the 104 level and corrected below 103 after the QE news. However, the market’s worries about the health of the Canadian economy in the environment of low oil and increased virus containment measures in its biggest trade partner, U.S., led to further weakness of the Canadian currency.

I’d also note that the U.S. has so far failed to sign a new coronavirus aid package, which is a near-term bearish catalyst for the U.S. dollar, but this does not prevent USD/CAD from the upside move, highlighting the strength of the current trend.

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Technical Analysis

The recent pullback in USD/CAD was short-lived, and the pair continues to move higher. The next major resistance is in the 1.4610 – 1.4670 area, near the recent highs. The previous major upside move in USD/CAD, which happened back at the end of 2015 – beginning of 2016, topped close to the same levels.

On the support side, the pair gets increased buyer interest above 1.4330. Currently, the upside trend remains intact, and it looks like the pair is ready to test the next resistance in the near term.

In my opinion, oil prices will dictate the dynamics of the following trading sessions. Should WTI breach the $20 level and bring Western Canada Select to new lows in the single-digit zone, USD/CAD will have good chances to get through the 1.4610 – 1.4670 resistance area and enjoy increased upside momentum at new highs.

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