Rebound in oil prices turns Canadian dollar bullish

The decline in the price of the crude oil to $25 per barrel, in January 2016, saw the exchange rates of commodity based economies crash through the floor. The Loonie was no exception to that. The EURCAD pair hit a high of 1.61041. However, the Canadian dollar has strengthened in the recent past to such an extent that market sentiment is slowly turning bearish against the EURCAD pair. The trading community believes that the EURCAD pair would see further declines in the coming weeks because of the following reasons.

The price of crude has bounced back by about 45% in the past two months. The exchange rate of the Canadian dollar is closely linked to the strength of the crude oil. Thus, the Canadian dollar has strengthened against most of the major currencies.

The recent Chinese economic data, contrary to expectations, indicated that Chinese crude import has in fact increased. The imports hit a record high of 8 million bpd in February.

The import recorded a 20% and 27% growth on a yearly and sequential basis. China is the second largest consumer of crude in the world. Thus, it is imperative that price is not going to reverse to $25 per barrel any time soon.

Paul Young: Retail Sales Canada January 2016

Secondly, the Canadian economic data is quite encouraging. The value of the manufacturing shipments increased 2.3% (m-o-m basis) to $53.1 billion in January. The analysts’ expectation was an increase of 0.5% on an m-o-m basis. Similarly, the Canadian retail sales increased 2.1% (m-o-m) in January. The gain was the largest since March 2010. The retail sales recorded a 2.1% decline (m-o-m) in December 2015.

Furthermore, in January, the core retail sales, excluding auto, rose 1.2% on a m-o-m basis.

On the other hand, the Euro is currently under severe pressure due to rate cuts and expansion in the bond purchasing program. Further, the Brexit referendum, to be conducted in June, has increased the concerns about the future of the Euro. Even with stimulus measures, the ECB expects the inflation to be 0.1% in the fiscal 2016. Only in 2017, the ECB expects the inflation to be above 1%. Thus, traders can expect the EURCAD currency pair to decline further.

Technically, the EURCAD pair continues to remain in the downtrend. The price action is confined within the declining channel. The currency pair should break above 1.52573 to indicate a trend reversal. The major support for the pair is at 1.42170 levels. Thus, a forex trader should take a short position in the currency pair at 1.4650 levels. A stop loss order should be placed above 1.4850. The short position should be closed when the price falls below 1.4300.

A canadian forex trader should purchase a put option contract with expiry in three to four weeks. Any strike price near 1.45 levels can be selected for the put option contract.

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