Why The U.S. Dollar Will Continue Marching Higher Vs. The Canadian Dollar

Chris B Murphy profile picture
Chris B Murphy
3.66K Followers

Summary

  • Crude oil is down over 14% from its yearly highs giving the U.S. dollar a boost.
  • With oil inventories high, USD/CAD should march higher.
  • The Fed and Brexit still hold the markets hostage, preventing huge breakouts.
  • Look for USD/CAD to rise and oil to remain bearish, followed by a consolidation period, as the market awaits clarity and direction from central banks.

As crude oil remains in bearish territory, the U.S. dollar or USD will likely continue its march higher vs. the Canadian dollar, CAD.

The correlation between USD/CAD and Crude Oil exists because Canada is an oil exporting country and derives revenue and job growth from oil exports.

As crude oil prices rise, Canada's economy improves since they take in more oil revenue. As a result, the Canadian dollar strengthens vs. the U.S. dollar.


Although the oil to USD/CAD correlation is not one-to-one, it's a significant driver in the currency exchange rate as of late.

You can see this correlation illustrated in the charts. As Crude oil fell in 2015, USD/CAD rose dramatically.

And when oil rose 60% from the lows to the highs of 2016, the USD/CAD weakened by over 16%.

Also from the chart, we can see huge spikes in price movements following price crosses of oil and USD/CAD. A price cross is a very strong signal and conveys a trend change.

Currently, oil prices have retreated roughly 14% from 2016 highs, giving the USD some life again. This move may signify a consolidation period for the two and should result in USD/CAD strength while oil fails to gain any traction.

(click to enlarge)

In looking at the chart on the right from the U.S. Energy Information Administration (EIA), the break of the February 2009 lows represents a bearish technical signal.

The collapse in crude oil prices has been caused by a glut of supply on the market, as noted in the U.S. EIA's weekly inventory report.

"U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 1.7 million barrels from the previous week. At 521.1 million barrels, U.S. crude oil inventories are at historically high levels for this time of year." U.S. EIA Weekly Petroleum Data For Week Ending July 22, 2016.

This article was written by

Chris B Murphy profile picture
3.66K Followers
Hello. I'm a financial writer/blogger & market risk analyst with 15 years in the financial services industry including over 10 years on trading desks of two major banks. --------------------------------------------------------------------------------------------------------------------- My Top-Down meets Bottom-Up Approach to financial analysis includes: ----------------------------------------------------------------------------------------- How Macro Trends & Economic Indicators, Bond yields, Capital flows, & The Fed - Drive Sectors & ultimately Individual Stocks. - Financial analysis of Bank stocks, Commodities, Industrials, & Tech. - Former currency risk advisor to Corporates, with Options and risk policy experience.- Published Work includes: Financial analysis (Investopedia); - Retirement Income (RetirementIncomeAnalyst.com) & Wealth Management Firms. - Hold an Economics degree with a concentration in Finance (University of Rhode Island).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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