Canadian Dollar Analysis: Weak Oil Prices Weighing on CAD Ahead of Powell Risk
15:50, 28 November 2022
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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
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.