Canadian dollar may strengthen due to higher oil prices

05 December 2022 238
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A rally of global currencies against the greenback has been ignored by the Canadian dollar. Mark Chandler, chief market strategist at Bannockburn Global Forex LLC, said that the currency often lags behind others amid a weak U.S. dollar.

However, this weakness could be partly explained by the high volatility of oil last week. Now, the immediate uncertainty on oil seems to be gone: the G7 has set the price cap for Russia at $60 per barrel for Urals oil, along with signing OPEC+ agreement to maintain the current oil production limits.

The price of oil reacts positively to these two factors, thus having a favorable effect on the Canadian dollar. Historically, Canada's currency has been dependent on oil prices.

When it comes to interest rates, the Fed is pretty straightforward about slowing its rate hikes in December to gauge inflation and economic growth.

The Bank of Canada is also expected to slow the pace of rate hikes on Wednesday in order to prevent a recession in the economy. The Canadian bond market, as well as the U.S. one, is pointing to this risk. The largest inversion of Canada's yield curve since 1994 can be traced by the fall in 10-year government bond yields that are 100 basis points lower than the 2-year ones.

In fact, both central banks report easing of interest rate hikes, so there is no multidirectional movement in monetary policy between the countries so far. A rebound in oil prices and a lag in the world's currencies may be decisive for the Canadian dollar's growth.

Technical analysis revealed that the currency pair USD/CAD is in a rising channel that started in the spring of 2022. 

Of course, there were attempts to accelerate growth and exit from this channel upwards in September-October, although quotations moved back a month later.

Last week, the upper boundary of this channel turned out to be tested. Now, the Canadian dollar may strengthen to the lower boundary of the uptrend, i.e. the level of 1.323, amid rising oil and lagging behind other currencies. A stop can be placed when moving to the trend’s upper boundary at the level of 1.358.

In case of the USD/CAD currency pair declining to the lower boundary of the trend

Take profit - 1,323

Stop - 1,358

This content is for informational purposes only and is not intended to be investing advice.

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