The Canadian dollar is the currency of an oil-exporting country, yet USD/CAD quotes are more sensitive to US stock market indices rather than to Brent and WTI. Why is this happening? Let’s explore this situation and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The correlation between the Canadian dollar and oil is weakening.
- The USD/CAD is sensitive to US stock indices.
- The loonie remains unfazed by Brent’s consolidation at high levels.
- Short positions on the EUR/CAD can be opened with targets of 1.587 and 1.576.
Monthly Fundamental Forecast for Canadian Dollar
The conflict in the Middle East sent the Canadian dollar on a roller-coaster ride. USD/CAD bears made a good start, but were then defeated by their opponents amid falling stock indices and rising oil prices. Although the loonie is the currency of an oil-exporting country, its correlation with Brent and WTI has been steadily declining.
Correlation Between CAD/USD and WTI
Source: Bloomberg.
The days when foreign investors poured massive amounts of money into Canadian oil sands are long gone. They remain shareholders, but companies now distribute most of their earnings rather than reinvest them. With limited new development and oil’s declining share of GDP, the Canadian dollar has become less sensitive to Brent and WTI prices.
In light of this, major banks recommend selling the loonie against other oil-linked currencies. For instance, JP Morgan Chase considers buying the Australian dollar and the Norwegian krone against the Canadian dollar a profitable trade. Citigroup expects the Mexican peso to rise at the start of the NAFTA renegotiation. Revisions to the agreement are scheduled for 2026. Ottawa and Mexico City are insisting on lower tariffs, while Washington wants to impose even tougher conditions on them.
Pressure from the US administration could become a challenge for USD/CAD bears. On the other hand, rising inflation expectations in Canada allow the futures market to price in a 60% probability of an overnight rate hike in October. The derivatives market does not predict any changes to the federal funds rate, and this divergence in monetary policy could support the loonie.
Inflation Expectations in Canada
Source: Bloomberg.
According to Scotiabank, the Canadian dollar’s correlation with oil could strengthen if supply issues shift toward demand-side pressures. Rising concerns over energy security may prompt countries to increase oil stockpiles over time.
Meanwhile, the USD/CAD pair is more sensitive to global risk appetite than to oil prices. Soaring US stock indices have pushed the pair’s quotes back to the pre-Middle East conflict levels.
Brent and WTI prices will likely remain elevated for a long time. At the same time, Canada is less vulnerable to them than other countries, such as Japan or the eurozone. Therefore, it makes sense to buy the loonie against the euro or the yen.
Monthly USDCAD, EURCAD, and CADJPY Trading Plan
The USD/CAD pair is likely to remain highly sensitive to global risk appetite and could enter a consolidation phase amid mixed performance in the S&P 500 index. Short positions on the EUR/CAD pair can be opened on pullbacks with targets of 1.587 and 1.576. Long positions on the CAD/JPY pair also look attractive. They can be opened with targets of 118.4 and 119.6.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDCAD in real time mode
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