“I assure you, ladies and gentlemen, that if we do find oil here - and I think there's a very good chance that we will - this community of yours will not only survive, it will flourish.”
In his inimitable performance as Daniel Plainview in the 2007 movie, “There Will Be Blood,” Daniel Day Lewis convinces the residents of a small California town called Little Boston to sell their drilling rights to him, promising massive prosperity for the small town. As the name of the movie suggests, the arrangement eventually takes a violent turn for the worse.
In some ways, Canadian dollar bulls felt a bit like the residents of Little Boston in the second half of last year. “Flourishing” on the back of strong oil prices in 2011 and 2012, the loonie surged to above parity against the US dollar, but as oil prices collapsed in the second half of last year, USDCAD surged back to 1.2800 in sympathy. Based on the recent price action in WTI and USDCAD though, the bloodbath may shift back against USD bulls next.
As we noted yesterday, WTI has surged to the top of its $44-$54 range this week, potentially putting new year-to-date highs in play (see “WTI: Three Fundamental Reasons for This Week’s Rally” for more). The recent rally in oil prices has led to a corresponding pullback in USDCAD, with the North American pairing now testing the bottom of its range around 1.2400. With the MACD crossing below its signal line for the first time in nine months and the RSI at a similarly low level, there is evidence that the bears are finally wresting control of the market from the bulls.
Back in January, USDCAD blasted through the 1.20-1.24 corridor in just two days, and if USDCAD breaks conclusively below 1.2400, another quick drop back toward the 38.2% Fibonacci retracement at 1.20 could be in play. That said, USDCAD’s 400-pip range has held for nearly three months now, so bulls will certainly try to defend the 1.2400 level; if USDCAD bounces from that floor later this week, more sideways consolidation will be favored. As a final note, traders should keep a close eye on Friday’s Canadian jobs report as a possible catalyst for USDCAD – expectations are low, with essentially no job growth and a steady 6.8% unemployment rate anticipated.