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USD CAD rebounds sharply on Canadian trade deficit crude oil pullback

Article By: ,  Financial Analyst
May 4, 2016 12:50 PM

USD/CAD continued its sharp rebound for the second consecutive day on Wednesday as crude oil remained in retreat, the US dollar saw a modest relief bounce, and the Canadian dollar was hit by data showing a worse-than-expected trade deficit.

The two-day rebound has lifted the currency pair from major support around the 1.2500 level, where a new 10-month low was established earlier in the week.

Supporting the rise for USD/CAD from its long-term lows were several key factors that weighed heavily on the Canadian dollar. Canadian trade balance data for March that was released on Wednesday showed a merchandise trade deficit of -$3.4 billion, which far exceeded prior consensus expectations of -$1.2 billion and significantly widened the deficit from February’s revised -$2.5 billion figure.

Exacerbating this pressure on the Canadian dollar, US crude oil inventory numbers were also released on Wednesday, revealing that crude stocks in the US last week rose by a higher-than-expected 2.8 million barrels against prior forecasts of a 1.7-million-barrel build. This data weighed on crude oil prices, which had already been pulling back since the beginning of the week, as well as prompted a further fall for the oil-correlated Canadian dollar.

Further contributing to USD/CAD’s rebound aside from a much-weakened Canadian dollar was a modest relief bounce for the US dollar, which had been falling precipitously for more than a week.

As of Wednesday morning, the sharp surge for USD/CAD prompted the currency pair to break out above previous resistance at 1.2800. With OPEC recently reporting rising and historically high levels of crude output, the global oversupply situation remains a persistent and valid concern. With any further weakness in oil prices, the Canadian dollar is likely to continue falling, potentially pushing USD/CAD to its next major resistance target at the 1.3000 psychological level. With any breakout above 1.3000, further bullish momentum could push the currency pair up to 1.3400 resistance, which is also where the 200-day moving average is currently situated. In the event of such a rise, the sharp downtrend that has been in place for more than the past three months could be at risk of coming to an end.

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