USD CAD rises off major support as crude oil retreats

USD/CAD dipped below key support at the 1.3000 psychological level early on Wednesday as the US dollar pulled back against commodity currencies and crude oil continued to surge. Later in the day on Wednesday, however, USD/CAD pared its losses and began to reverse course as crude oil retreated on US government data that revealed a greater-than-expected inventory build.

The Energy Information Administration reported that crude oil inventory in the US rose by 3.1 million barrels last week, substantially surpassing previous expectations of a 2.2 million barrel increase. Prior to this report, West Texas Intermediate (WTI), the US benchmark for crude oil, spiked to reach a high surpassing $49.00. After the data was released, however, WTI once again fell below $48.00.

With the Canadian dollar positively correlated to the ebbs and flows of crude oil prices, USD/CAD initially hit a low of 1.2970 early Wednesday to cap off a full week of sharp declines from late September’s 11-year high of 1.3456. As crude oil reversed its earlier gains, however, USD/CAD rebounded well above 1.3000.

Having settled above this key 1.3000 level, the currency pair is at a critical juncture. Any subsequent resumption of this past week’s downside momentum with a re-break below 1.3000 could easily pressure USD/CAD back down to major support at the 1.2800 level, which represents the previous long-term highs before the upside breakout in mid-July.

On a longer-term basis, however, despite an apparent slowdown in US production of crude oil, the global oversupply situation appears likely to persist. If this is the case, and crude oil prices remain suppressed, USD/CAD should continue to be supported. In this scenario, the upside target on a rebound continues to be around the key 1.3400 resistance objective. Friday’s employment change and unemployment rate data for Canada could also play a role in determining short-term direction for the currency pair.