Oil recovery will help the Canadian dollar

26 December 2022 61
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EURCAD pair moves in an uptrend since the end of August. The November attempt to break the trend was unsuccessful, and in December the growth rate increased significantly, causing the price to move far away from the trend line. Considering the extreme overbought level of the RSI, last week's correction looks clearly insufficient, especially since a number of fundamental factors are on the side of the Canadian dollar again.

 

First of all, Canadian currency is benefiting from the recovery of oil prices out of annual lows, which has been going on for the last 2 weeks. Demand for oil increased on the back of frosts in the U.S., and next year prices will be supported by production cuts in Russia and the recovery of fuel consumption in China after elimination of COVID restrictions.

 

The Canadian dollar also benefited from the latest GDP data. The economy grew by 0.1% in October, as is was expected by most analysts. The positive dynamics allow the Bank of Canada to continue tightening policy. Considering that the Canadian regulatory authority will hold its meeting in one of the first next year (already on January 25), a lot of things will depend on its decision, the steps of other central banks, including the ECB.

 

The European regulatory authority next year will also continue the policy of increasing interest rates. But its commitment may be seriously tested, especially by the countries with the largest debt burdens. For example, Italian officials are already calling for stopping the rate increases as payments on government bonds are becoming an increasing burden on the budget. Such a problem is certainly to be discussed in other Southern European countries, so reaching a consensus will not be easy for ECB officials.

 

On the way of the EURCAD correction there are 2 round levels - 1.43 and 1.42. Their achievement will help to ease the RSI from the overbought condition, but at the same time it will keep the main upward trend of EURCAD.

 

 

The following trading strategy options can be offered:

 

Sell EURCAD at the current price. Take profit 1 – 1,43. Take profit 2 – 1,42. Stop loss – 1,453.

 

Also, traders may use Trailing stop instead of a fixed Stop loss at their convenience.

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