Canadian dollar to strengthen on recovery in crude price

A sharp decline in the price of crude oil weakened the Canadian dollar considerably in the past two weeks. On the contrary, political uncertainty in Europe and failure of Republicans to repeal Obamacare increased the demand for safe haven currencies such as the Yen. That took the CAD/JPY pair to a low of 82.22, from a high of 85.26 recorded two weeks before. However, the reasons given below indicate the possibility of a bullish reversal in the CAD/JPY pair.

The core consumer prices in Canada increased 0.4% m-o-m in February, according to Statistics Canada. The reported figures beat analysts’ estimates of a 0.1% increase.

During the previous month, the CPI (consumer price index) reading increased 0.5%. Notably, a week earlier, Statistics Canada reported a 1.7% m-o-m increase in retail sales in January. It was higher than market’s expectation of 1.3% growth and better than previous month’s downwardly revised 0.5% decline.

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On Tuesday, the price of Texas crude hit a one-week high of $48.73. Disruptions to crude production in Libya and the possibility of a six-month extension to the production limiting agreement, signed in December 2016, between OPEC and other oil producing nations, boosted the price of crude oil. Energy sector accounts for nearly 10% of Canada’s GDP. So, a rise in the price of crude is always favourable to the Canadian dollar.

In Japan, the retail sales increased 0.1% y-o-y in February, compared with 1% growth in the previous month. Analysts had expected 0.5% increase in retail sales. It is the weakest increase since October 2016. On a monthly basis, retail sales recorded only 0.2% growth, versus 0.5% increase in the earlier month. In the US, consumer confidence index increased to a sixteen year high of 125.6 in March, from 116.1 in February. This would strengthen the Greenback and weaken the Yen. Thus, fundamentally, a rally in the CAD/JPY pair can be expected.

Technically, the CAD/JPY pair seems to have found support at 82.40. The argument is also supported by the momentum indicator, which has formed a positive divergence with the price. Thus, a long position in the counter will have a minimum risk.

A currency trader can open a long position near 83, with a stop loss order below 82. The long position can be sold near 84.40.

A replica of long position in the currency market can be created in the binary market by purchasing a call option. It would be wise to open a trade when the CAD/JPY pair trades near 83 in the OTC market. Finally, a date around April 8th can be chosen as the expiry date.

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