Canada Markets

Canadian Dollar Moves with Crude

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The December Canadian dollar will close higher against the U.S. dollar for the fourth consecutive session on Monday, while extending the short-term uptrend since reaching a mid-November low. The current exchange rate is in overbought territory (second study), while latest CFTC data shows investors holding a net-short position for the 11th straight week. (DTN graphic by Nick Scalise)

Events in the crude oil market, first an OPEC agreement to cut production by 1.2 million barrels per day and then a weekend agreement between OPEC and a group of 11 non-OPEC producers that have also agreed to cut production, has resulted in a sharp rally in crude oil along with increased buying interest in the Canadian dollar.

The December Canadian dollar future has gained 1.8% in the week of Nov. 28 while gaining an additional 1% during the week of Dec. 5. Monday's move saw the Canadian dollar rally for the fourth consecutive session to reach a fresh seven-week high, while breaching technical resistance at $.76048 CAD/USD. This represents a 38.2% retracement of the move from the April 29 high of $.80 to the Nov. 14 low of $.73605, calculated at $.76048 CAD/USD.

It's interesting to see the varying moves taken by noncommercial traders or investors in the crude versus the Canadian dollar markets. As of Dec. 6 CFTC data, investors sharply increased their net-long position in crude oil futures by 31% from the previous week to 377,626 contracts, a six-week high. At the same time, investors in the Canadian dollar held a bearish net-short position for the 11th consecutive week (lower-study on attached graphic), reducing this position by 418 contracts or 2.3% from the previous week. Over the past four weeks, this position held by investors remained someone static, reported within a narrow 1,137-contract range. It is this short position that can leave the Canadian currency vulnerable to a sharp rise such as we are seeing should this group become increasingly nervous.

The move above the 38.2% retracement could result in a further upward move to a test of the 50% retracement of the same uptrend found at $.76802 CAD/USD. Prior to reaching this level, resistance also lies at the contract's 200-day moving average (purple line) calculated at $.76488 CAD/USD, while resistance from the downward-sloping trend line, drawn from the contract's April high at $.80 is found at $.7670 CAD/USD, which will also act as potential resistance.

While the stochastic momentum indicators are shown to be in overbought territory (middle-study), both the December weekly chart as well as the continuous active weekly chart (not shown) show momentum indicators trending higher while near the mid-point of the neutral zone on the chart, between the overbought and oversold area of the chart. This suggests that the move higher on the weekly chart could continue.

While the movement of crude was at the center of Monday's radar in Monday's commodity trade, market watchers will also be watching for the U.S. Federal Reserve announcement this week which could result in a move to increase that country's interest rate, a move suggested to be priced into financial markets with 100% certainty. This could temper the Canadian dollar activity given its recent strength.

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Cliff Jamieson can be reached at cliff.jamieson@dtn.com

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