This week is going to be centered around 3 themes. The first is obviously geopolitics and the invasion of Ukraine by Russia. The second will be the FOMC meeting on Wednesday where the markets are expecting at least a 25bps rate hike and some forward guidance that gets the FFR up by 1% into the summer months, and thirdly the COVID-19 rate of infections is rising again around the world.
Forex Analysis - USDCAD
For two years we would have not imagined anything could be worse than a continuing rate of infection, but a world war is perceived to be more deadly. War and Covid could have the same economic impact with a slowdown in economic activity and a lack of Direct Foreign Investment into the countries that back Russia. The Russian economy is already starting to feel the effects of ever-greater sanctions but none of us will escape the downturn.
The UoM sentiment index which came out last Friday showed a decline in consumer sentiment as people feel the pinch of higher oil prices permeating through their monthly bills, and the threat of war worrying them into saving more for a rainy day.
The price of Brent has come off its highs and is traveling back to the $100 per barrel and possibly the 2.618 fib extension and $83 per barrel. The main reason I am looking for lower prices is down to the ActivTrader sentiment indicator which is showing 95% of traders are long the Brent contract and the narrative coming out of the White House which is scrambling around looking for more supply. US President Biden’s campaign was a green agenda so he will run the risk of annoying a lot of his voting base by calling for a ramp-up in oil production. He may also lose credibility by discussing purchasing oil from Venezuela and Iran. If he does nothing, he runs the risk of losing control of the US houses as ordinary citizens protest and vote at the exponentially rising cost of fuel.
The 1st of March impulsive jump from the $100 per barrel level looks like a logical first target but the rising trend line just below is also a good indication of where possible stops may reside along with a gap in price from Friday 25th Feb close to 28th open.
The US 10-year yield is also rising into the FOMC decision, and this is helping to support the US dollar which is also getting safe-haven flows. Maybe on Wednesday the markets sell the news or don’t feel the FOMC is able to carry out the rate hike schedule due to political uncertainty. But until the statement is released and the Fed Chair is quizzed it appears the yields are traveling higher.
I am looking to see if the 1.27400 level on the USDCAD holds for another push into the 1.28600 level to fill the imbalance from the 9th of March. The TA shows that the most recent swing high and low, expanded the previous range, and the current breakout of the descending channel from the most significant swing high found a base at a Fib retracement level.
A stronger dollar is going to weigh on the long-term price of oil, as when a commodity gets too expensive it generally outprices demand and economic activity suffers. If oil comes lower for the first few days of this week, that will depress the Canadian dollar most and the USDCAD will rise. It is then up to the Fed on Wednesday to keep the US dollar bull move going.