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Canadian Dollar Analysis: Weak Oil Prices Weighing on CAD Ahead of Powell Risk

By Justin Mcqueen

15:50, 28 November 2022

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Canadian Dollar Outlook
Canadian Dollar Outlook - Photo: Capital.com, Source: GettyImages

Crude Oil Prices Fall to Yearly lows

A risk-off tone to begin the week as concerns around China’s covid situation and subsequent protests dominate price action. In turn, equity markets have been on the backfoot and while the USD initially benefited from a safe-haven bid, it has since pared recent gains since European participants entered the fray. Alongside this, oil prices remain depressed as Brent crude futures trade at their lowest level since January, in which the RSI has fallen to the lowest level since December 2021. Consequently, the oil-linked FX currencies have been on the back foot, most notably the Canadian Dollar. As such, new Covid cases hitting a fresh record high have further dissipated the recent optimism surrounding a potential deviation away from the zero-covid policy. 

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1-Day FX Performance

FX daily returnFX daily return. Photo: Capital.com, Source: Finviz

Topside Risks Remain for USD/CAD

On the technical front, USD/CAD remains within a 1.3200-1.3500 range and with Chair Powell due to speak on Wednesday, risks are titled towards testing the top of that range. What’s more, US/CA spreads have widened further in favour of the greenback. While the pair are likely to follow the ebb and flow of risk sentiment in the short term, the key focus will be on Fed Chair Powell. The Chair’s speech on Wednesday will mark one year since he dropped the word transitory regarding the inflation outlook. While the softer-than-expected US inflation report has underpinned the rally in risk appetite. As several Fed Officials have stated, this is only one data point and there are still ways to go before the job is done. Alongside this, to ensure that inflation continues to head lower, the Federal Reserve is trying to tighten financial conditions given that this is the transmission mechanism of their policy. The general components include the USD, equities, corporate bond spreads and the overall level of mortgage and corporate borrowing rates. Since Fed Chair Powell’s post-FOMC presser, equities have rallied, the USD has weakened, rates have dipped and corporate bond spreads have narrowed. This is against what Chair Powell and co are trying to achieve and consequently, this does provide a risk for equity bulls hitting and USD bears.

USD/CAD chart: daily time frame

USD/CAD ChartUSD/CAD Chart. Photo:Capital.com. Source: TradingView

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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