USD CAD breaks out on US dollar rebound continued oil weakness

Tuesday’s US dollar pullback and crude oil bounce were short-lived, as Wednesday saw a different story unfold. The US dollar rebounded strongly on Wednesday, while US crude oil (WTI) dipped under $50 again as data showed that US oil inventories unexpectedly rose by over two million barrels last week.

The Energy Information Administration reported on Wednesday that US crude oil stocks shot up by 2.5 million barrels, while analysts were expecting a drawdown of around 2 million barrels. This data helped confirm Tuesday’s report by the American Petroleum Institute, which showed a rise of 2.3 million barrels last week.

This combination of a US dollar rebound and persistently weak crude oil prices pressuring the Canadian dollar prompted the USD/CAD currency pair (daily chart shown below) to break out to a new six year high above 1.3000 resistance. Wednesday saw an initial high of 1.3051, just 10 pips off the high of 1.3061 that was hit in March of 2009. Any further upside momentum that prompts USD/CAD to break above 1.3061 would establish a high not seen since September of 2004.

For the past year, the currency pair has been trading within a strong bullish trend framed by a well-defined uptrend line extending back to July of last year. That trend line was tested on a pullback in mid-June, but for the past month, USD/CAD has advanced almost unceasingly to its current heights.

With the US dollar continuing to strengthen and crude oil continuing to be pressured by persistent oversupply conditions, USD/CAD could well have further to run before making any significant pullback or correction. In this event, the next major target to the upside is at the 1.3200 resistance level. Strong downside support on any pullback remains around the 1.2800 level.