USDCAD Forecast As Crude Oil Prices Tumble

The USDCAD price spiked to the highest level since February this year as the market focused on the hawkish Federal Reserve minutes and the falling crude oil prices. The pair rose to 1.2850, which was about 7% above the lowest level in May. 

Hawkish Fed and strong US dollar

The USDCAD pair is in a sharp uptrend mostly because of the overall stronger US dollar. Indeed, the dollar index had jumped to the highest level since November last year.

The dollar strength is attributed to several factors. First, there has been a general shift towards safe havens as the Covid-19 pandemic continues to spread. The main catalyst this week was the decision by New Zealand to announce a level 4 lockdown to curb the spread of the virus. In periods of elevated risks, investors tend to move to the safety of the US dollar.

Second, the Federal Reserve has started to shift further to the hawkish side. Last week, Fed speakers like Mary Daly and Raphael Bostic said that the Fed should start thinking about winding down asset purchases if the economy maintains its bullish trend. 

The hawkish sentiment was confirmed when the Fed published minutes of the recent Federal Open Market Committee (FOMC) on Wednesday. The minutes showed that most committee members were open to the idea of tapering asset purchases. Therefore, there is a general view that the bank will start winding down the purchases by the end of the year.

A hawkish Federal Reserve is usually a good thing for the US dollar. Still, as the Covid-19 cases rise, there is a possibility that the bank will have a wait-and-see approach for a longer period than expected. Recent data showed that consumer inflation is easing while the labour market remains steady.

Crude oil prices

The USDCAD pair also jumped due to the performance of crude oil prices. This is an important factor, considering that Canada is the fourth biggest oil exporter in the world. The country does well when oil prices are at elevated levels. 

The price of crude oil has slumped substantially in the past few days. Brent, the global benchmark, has declined from the year-to-date high of more than $76 to the current $66. Similarly, the price of West Texas Intermediate (WT) has declined from more than $75 to the current $63.

This price action is mostly caused by investors anticipating more lockdowns as the Delta variant spreads. Besides, countries like Australia and New Zealand that saw fewer infections have moved into lockdowns. At the same time, some industries like cruise liners have seen an uptick of infected people. 

Therefore, the Canadian jobs numbers that will come out on Friday will likely have no major impact on the USDCAD pair. The numbers are expected to show that the headline retail sales bounced by 4.4% while core sales rose by 4.6% in July. This will be an impressive comeback after the two declined sharply in June.

USDCAD technical analysis

The USDCAD pair has been in a strong bullish trend recently. It has risen above the 25-day and 50-day Exponential Moving Averages (EMA). Further, it has moved above the key resistance level at 1.2805, while the Relative Strength Index (RSI) has risen above the overbought level.

Therefore, the pair will likely continue its bullish trend as investors target the key resistance at 1.300. On the flip side, a drop below 1.2600 will invalidate this view.