Canadian Dollar Outlook Undermined by Oil Price Vulnerabilities

The Canadian dollar exchange rate complex (CAD) has started the new month from a position of weakness.

This comes following a strong period for the currency which saw gains notched up against the majority of trading partners courtesy of those rising oil prices we saw in March.

And so it is fitting that the primary driver of this new bout of weakness has been a turn lower in global oil prices.

As we have seen time and again the CAD remains sensitive to movements in oil and commodity prices simply because of the high importance oil plays in the Canadian export basket.

Also failing to turn traders onto the CAD at the end of March was the release of monthly GDP data which indicates that the Canadian economy remains in contraction.

Figures indicate that the economy contracted by 0.1% which will leave many concerned that another interest rate cut at the central bank could take place.

Canadian Dollar Rates

• The pound to Canadian dollar exchange rate (GBP-CAD) is at 1.8700.
• The euro to Canadian dollar exchange rate (EUR-CAD) is a standout as it is the one area the CAD is experiencing strength. The rate is 0.47 pct lower at 1.3583.
• The US dollar to Canadian dollar exchange rate (USD-CAD) is 0.40 pct higher at 1.2606.

(Please note that all FX quotes here are from the wholesale markets - your bank will affix a spread to the rate to derive profit. However, an independent FX provider will undercut your bank's offer, this can deliver up to 5% more currency in some instances.)

Oil Prices Under Pressure

The Canadian currency is set to enter April suffering bruising losses on the back of a softer commodity price complex.

The pressures being exerted on oil prices continue. An oversupply in the United States continues to press prices lower; however the situation could be amplified if sanctions on Iran are lifted.

“The deadline looms for talks with Iran on its nuclear programme. Traders worry that a deal would ease sanctions and the country would flood the already oversupplied market with more crude oil. American inventories are so high now that Saudi Arabia’s crown as the world’s top oil producer is coming under threat from the US,” says Augustin Eden at Accendo Markets.

A similar story for the UK benchmark, Brent ($55), also trading sideways into this week on global supply glut worries with Middle East uncertainties failing to bolster the price.

But do they ever really do that?

Either way, for the CAD we could see the recent strength ultimately capped by geo-politics.

Outlook for the Canadian Dollar

USDCAD has shifted to test the higher end of its range but it would appear a massive run higher is unlikely at this stage.

“Range trading continues to be the core theme for USDCAD and technicals are supporting this. Resistance comes in at the March 18 high of 1.2835, a break above this level would open up a test to 1.2900; however technicals are not warning of an imminent break. Support lies at today’s open of 1.2675,” says analyst Camilla Sutton at Scotiabank.

The pound sterling to Canadian dollar is meanwhile looking intent on closing the recent downside move.

GBPCAD closed last Friday’s session on a significantly firm note as the close saw GBP-CAD break through short-term trend resistance (formerly support) near 1.86.

This was the early 2014 high that was viewed as quite pivotal for the GBP on the way down by analysts at TD Securities.

TD analyst Shaun Osborne says there is a chance that the market has set a medium-term low.

However medium-term trend momentum remains negative and longer-term studies are neutral “which may hinder GBP progress and it may be some time before it is clear that the broader bull trend is back on track or not,” says Osborne.