Pound to Canadian Dollar: Higher After Oil Falls To Fresh Lows
The Canadian Dollar's main driver is the price of oil, which continues to make fresh lows. Is there an end in sight for the commodity's relentless sell-off?
Analysts at Bank of America Merrill Lynch do not yet see a bottom in oil but think that if it falls into the $20’s per barrel zone it might be close:
“A decline into the $20s would mean that many companies would not be able to cover operating cash costs, marking a possible inflection point for oil.”
In a recent Global Energy Report BofA go on to discuss in detail evidence pointing to a bottom in the commodity or not.
Although the fact that U.S Shale production is falling rapidly and West Texas Crude is above Brent – a common sign oil might be reversing its trend, they cite the dollar not being strong enough as a factor indicating a bottom could be some way off still:
“Still, we believe it is early to pick a bottom. The dollar (either trade weighted or the DXY) is still far off from previous cyclical highs.”
“Crucially, it is hard to predict the oil market effects of increased animosity between Saudi and Iran.”
“..the conditions for a floor in crude oil prices are coming together: spot crude prices are nearing cash costs, a bumper US driving season is approaching, the CNY is finally starting to move towards fair value, shale production is falling, and WTI has now matched Brent.”
Based on this they predict that oil may start to recover in the middle of 2016:
“This combination of factors will ultimately lead to a bottoming out of global crude oil prices in 1H2016 and a recovery into the summer months, in our view.”
BofA urge restraint, however, to those investors keen on picking a bottom:
“The price war within OPEC has just taken a turn for the worse this past weekend. Plus Iranian barrels are about to hit the market and China seems to be in the midst of a swift CNY depreciation move.”
“Moreover, a warmer than normal winter in both the US and Europe has shaved off about 200 thousand b/d of demand in each region.
"Demand for middle distillates is contracting in China too. As we argued in a recent piece, a combination of factors could still drive crude oil prices into a mid $20s scenario in the very short term given the extremely high inventories. “
In the end commodity analysts at BofA actually decide to revise their longer-term forecasts for oil:
“On the back of these risks, we are now revising down our crude oil forecasts and see Brent averaging $46/bbl in 2016, from $50 prior, and WTI $45/bbl, from $48 prior.”
Domestic forces
As I have already mentioned in previous reports, there are those who have been making bullish calls for the Canadian Dollar since the start of December based on economic fundamentals not associated with the price of oil, such as the team at HSBC, who called USD/CAD to reach 1.25 in 2016. The pair is currently at 1.41.
Nevertheless, HSBC expect the source of renewed strength to come primarily from an aggressive programme of fiscal stimulus adopted by the new government, who are jettisoning previously more austere policies.
Other analysts have pointed out that as CAD weakens it will eventually begin to help a recovery to take root as it will increase greatly the attractiveness of cheap Canadian Exports, driving an export boom in the economy.
Nevertheless, it still seems the case that the currency is held hostage by oil, with no signs of uncoupling from it any time soon.
Chart View
GBP/CAD is in a broad up-trend and after a recent sell-off the pair has started moving higher again, however, the rally is not as strong as USD/CAD which benefits from the strength of the dollar.
Nevertheless, the pair has successfully broken out of flag-like correction and started moving higher, and it will probably continue higher, eventually probably matching the previous high at 2.0960.
Volume is supporting the start of the new trend higher over the past days and if the exchange rate can move above 2.0760 would provide confirmation that the pair was on its way tp the aforesaid target.
As for USD/CAD, it is in a strong up-trend which may have become overstretched and be ready for a pause, and possible a correction.
The pair has reached a double layer of formidable resistance which could indicate it might consolidate.
First there is the R1 Monthly Pivot in the 1.41s, and then also the 100% Fibonacci extension of the A leg, of the A-B-C move, which is also in the 1.41s.
There may be a pull-back from here to 1.4000, or alternatively if the exchange rate does go higher and breaks above 1.4300, it will probably go to 1.4437 where the R2 Monthly Pivot is situated.
