USD/CAD analysis & crude oil to target 100.00 or a correction?

At present, the USD is holding key support and could be building a base for a move to the upside. Our view of the fundamentals, sentiment, and key technical levels are below.

The outlook for interest rates
We have a generally bullish view of the CAD in terms of interest rates: speculators are heavily long on the view that the Bank of Canada will be hawkish going forward:

“*At the January meeting markets priced higher than 50% likelihood of a rate hike yet BoC kept its guidance that the first hike will come in the “middle quarters” of 2022. While we cannot rule out a hike at the interim March meeting, we still think the big meeting in April is the most likely time for the first hike. We still regard relative rates to be positive for USD/CAD.*” (Danske Bank)

In addition, over the last few weeks, speculators are seeing a more dovish Fed, but the USD has held support at 1.2660 on the chart below.

The impact of crude oil
Speculators have also bought the CAD heavily on firm crude oil prices: ‘Oil will “certainly” hit $120 a barrel and the global economy will be “radically altered” if Russia invades Ukraine’, veteran strategist David Roche has predicted. (CNBC) We could see crude oil move even higher if there were a military conflict, but this wouldn't strengthen the CAD in our view. That’s most likely because the USD would gain strength on its safe-haven status.

Speculators have already bought crude on the prospect of conflict, and we have a bullish extreme – if crude were to break lower this would weigh on the CAD. So, if crude oil rises or falls, the USD is likely to strengthen. We think the good news is discounted for the CAD, large speculators hold a significant long CAD position on the COT Net Trader Positions, and this could warn of a rally in the USD.

Technical analysis
In terms of the daily chart, we have moved sideways for a few weeks but held a major support level at 1.2660, resistance on the upside is 1.2930, then monthly resistance at 1.300 then 1.3500.

Crude oil analysis $100.00 or a correction?

Crude oil has moved sharply higher, but prices have stalled recently, so could we see a correction? Our view of the fundamentals, sentiment, and technicals are below: In terms of crude oil, a warning of a possible correction comes from Backwardation which is at near a decade high as we can see on the chart below:

The reason why the spot price is trading far higher than 6 months forward is mostly due to speculators buying crude oil on tensions between Russia and Ukraine and possible conflict. In terms of crude oil moving higher from here, more volume and liquidity is needed, but on the chart below we can see interest did not rise last week - it actually fell.

In terms of crude oil, we have a bullish extreme in the short term and due to the low liquidity and volume, if we do see a correction, it could be severe and target major support levels. Our view of the technical levels of support and resistance to look out for are on the chart below...

Technical analysis

In the last two weeks, we have seen crude oil's upside momentum slow, a break of the 20 Day Moving average and a close below the 89.00 level as setting up a correction down to major support levels indicated. In terms of rallies, we have resistance at 91.50 then 92.50.

Not investment advice. Past performance does not guarantee or predict future performance.