USD CAD soars to new 11 year high on crude oil lows

USD/CAD surged sharply on Tuesday for the second consecutive day this week, hitting its upside target at 1.3600 and establishing a new 11-year high. This high occurred just as crude oil (West Texas Intermediate) hit its own 6-year low below $37 a barrel, placing considerable pressure on the oil-linked Canadian dollar.

Crude oil made a moderate rebound by the close on Tuesday as some short-covering provided a bit of relief for the heavily-sold commodity, but momentum remained firmly to the downside. Last week’s OPEC meeting failed to produce any agreement on an oil production ceiling, exacerbating an already critical oversupply issue. This utter lack of unity among major oil-producing countries helped to push WTI below its August lows this week to approach price depths not seen since 2009.

Though the US dollar was mixed on Tuesday, falling against the euro, yen, and Swiss franc, the greenback rose sharply against commodity currencies like the Australian and Canadian dollars.

In the case of USD/CAD, this week saw the currency pair break out sharply above key 1.3400 resistance and September’s 1.3456 high to hit its price target at the noted 1.3600 resistance level. Prior to this week’s breakout, USD/CAD had already been rising steadily in a marked uptrend for nearly the past two months from its 1.2800 support base in mid-October. This rise was due in part to a strengthening US dollar in anticipation of a potential Fed rate hike in December, as well as sharply falling oil prices that pressured the Canadian dollar. Also weighing on the Canadian dollar in recent months has been a dovish Bank of Canada that has cut its key interest rate twice this year.

The overall trend bias for USD/CAD remains strongly to the upside on continued weakness in the oversupplied crude oil market as well as anticipation of a Fed monetary tightening cycle potentially beginning next week that may or may not already have been fully priced into the US dollar. Despite this USD/CAD strength, however, the currency pair is technically over-extended and due for at least a profit-taking pullback after having reached its noted 1.3600 upside target. Key support on such a pullback should reside around the 1.3400 previous resistance level. In the event of a resumption of the strong bullish trend, major upside targets reside at the 1.3800 resistance level followed by the 1.4000 psychological level.