There is a case being made that the price of energy should be coming down due to supply coming into the markets from OPEC+, but currently the market is viewed as being tight which is applying upward pressure on the energy markets and the Canadian Dollar. As Canadian inflation rises the Bank of Canada will look to rate hikes to cool the economy, but this is also likely to come on the back of a Fed rate hike. With monetary policy cancelling out the rate hikes, it is left to supply and demand of oil which is hanging in the balance due to possible geopolitical tensions flaring up and supply issues by OPEC+ members.
Forex Analysis - USDCAD
Since the start of 2022, the CAD has been one of the best performing G10 currencies. This continues the bullish trend from last year when it was the best performing G10 currency. A temporary setback occurred in late December when USDCAD hit an intraday high of 1.2960.
USDCAD has been trying to break through resistance at around the 1.2600-level, which is the 200-day moving average. Oil's sharp rebound in price and signs that the Bank of Canada (BoC) may raise rates soon have been the main reasons for the CAD's recent outperformance. As a result, leveraged funds in the Commitment of Traders report show a cut back in their short positions in CAD recently.
Over the past week, oil prices rose to fresh highs and have fully reversed the sharp declines from November 2021 with Brent crude oil rising above $85 per barrel for the first time since October 2021. In its weekly report, the International Energy Agency noted that the oil market appears tighter than expected due to the less extreme impact of the latest wave of Omicron. Geopolitical tensions between Russia and the West could also pose upside risks to the price of oil going forward and with the US and UK removing key personnel from their Ukrainian embassies, things look to be getting worse there before they get better.
The stronger CAD has also been spurred by speculation that the BoC will raise interest rates as early as this week jumping ahead of the US Fed on Wednesday. Reuters estimates that the Canadian OIS market is pricing in around 21bps of tightening for the January meeting and almost 150bps for the year. Both headline and core inflation increased in December, so we should expect a hawkish signal from the BoC that it will raise rates soon with probabilities moving higher that they follow in step with the Fed either at the March or April meeting. Canada's economy could, however, be harder hit by the latest Omicron wave in the near term, given the tighter restrictions that have been re-imposed. The risk then is that the market is positioned with expectations one way, but the BoC might be justified in exercising a little more caution in the near term and therefore risking disappointing the market.
The ActivTrader sentiment indicator shows that an extreme level of traders on the platform are bullish on the USDCAD, so I would expect to see the USDCAD drop to squeeze these traders out of their position.
The price action is approaching the levels that I would like to see the USDCAD reject for a continuation lower. If the Fed signal a more Hawkish stance than the BoC on Wednesday, we could blow through these swing highs on the H1 and test higher. In which case I will stand aside. If there is a decent rejection with high volume around 1.2620-1.2650 this will be the trigger for my short idea.