By Dave Evans of Binary.com
Oil Price Slide Heaps More Pressure on Canada
Almost forgotten amidst the ECB’s recent big QE announcement and the Greek election result has been the decision by the Bank of Canada to cut rates to 0.75% in January. The key driver for this was the sudden plunge in oil prices, with Canada being the biggest oil exporter in the G7. Although oil extraction only accounts for 3% of GDP, crude oil does account for 14% of exports.
The USD/CAD rally has accelerated in recent weeks, driven at the end of January by the announcement that Canadian GDP dropped by more than expected to -0.2% in November. The corresponding US figures were hardly anything to write home about, but this has been offset by strong Chicago PMI figures and an 11 year high for consumer sentiment.
USD/CAD Daily Chart
The longer term monthly charts shows just how extreme the January run up was, with the USD/CAD now hitting its highest levels since the height of the 2008/09 recession.
USD/CAD monthly chart
The following monthly chart of oil shows that this current slump in the value of the Canadian dollar and the 2008 struggle both corresponded with a fall in oil prices.
Oil Prices Monthly Chart
The chart above also displays an indicator which measures the size of the spread between oil prices and its Parabolic SAR indicator. When this gap becomes not just large, but large by historical standards, it is a sign of extreme price movement.
You don’t need an indicator to spot that the recent slump in oil prices is extreme. What is interesting however is the number of months that oil spent at these extreme levels in the last sump around 2008. At that time, oil was in extreme selling territory for around six months, while the current run is in its third month.
It is impossible to draw direct comparisons between the two periods, but it does highlight the danger of expecting an immediate turnaround in oil prices.
Markets themselves don’t know what to expect, which is why the Bank of Canada may have to take the extreme step of back to back rate cuts at their March meeting. Cutting too soon could be seen as a knee jerk reaction, but every month that oil remains below $60 is another damaging month for the Canadian economy. Analysts currently make it 50/50 that the Bank of Canada will cut at its next meeting, but these odds will only shorten as oil prices struggle.
US Dollar has Further to Climb
By the contrast, the US dollar is continuing to push higher on the back of an increased likelihood of the Federal Reserve raising rates, possibly this year. The US economy generally seems to be stabilising, while corporate earnings continue to impress – not least for the tech companies, led by Apple.
US Dollar Index Daily Chart
With the prospects of a near term increase in US interest rates, in the context of another cut to Canadian lending, the USD/CAD rally could yet break those 2008 highs.
A higher trade on the USD/CAD would be a simple way to play this, but a more strategic approach could be to bet using a ‘One Touch’ trade. With oil prices likely to be volatile in coming months, any move higher could also be followed by sharp declines. With a One Touch trade, you only need your target level to be hit once for the trade to win.
Disclaimer: This financial market report is intended for educational and information purposes only. It should not be construed as investment or financial advice and you should not rely on any of its content to make or refrain from making any investment decisions. Binary.com accepts no liability whatsoever for any losses incurred by users in their trading. Fixed odds trading may incur losses as well as gains.