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USD/CAD analysis: Loonie to rally on OPEC+ output cuts?

By Piero Cingari

14:13, 5 October 2022

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In this article:
Oil - Crude
Crude Oil
72.58 USD
-2.05 -2.750%
1.36503 USD
-0.00035 -0.030%
0.68855 USD
-0.00145 -0.210%
99.880 USD
-0.495 -0.490%
1.43526 USD
0.00605 +0.420%

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 Close up of the loonie or Canadian dollar coin. The coin is shiny, dated in 2016, and depicting the traditional duck.
Close up of the loonie or Canadian dollar coin – Photo by Roberto Machado Noa/LightRocket via Getty Images

OPEC+ has taken a hard stance, cutting production by 2 million barrels per day (bpd) beginning in November 2022, the largest cut in crude oil output since March 2020.

Following the OPEC+ announcement, WTI oil briefly spiked to an intraday high of $87/bbl. It then broke through that level on the back of disappointing US crude oil inventory data (-1.36mln barrels vs. 2.05 expected) and a strong US ISM Services PMI, which delayed recessionary warning signs after the weak ISM Manufacturing PMI.

Crude WTI prices are still 30% lower than their March 2022 peak, and OPEC+'s move risks putting renewed pressure on the global supply-demand balance of crude oil in the coming months, potentially resulting in a price floor. 

When discussing oil, it is impossible not to consider the oil-linked major currency par excellence, the Canadian dollar (CAD). 

What influence can OPEC+'s decision have on the fate of the Loonie?

CAD should benefit from a tighter crude market

Oil prices vs USD/CAD – Photo:, Source: Tradingview

The Canadian dollar has suffered in recent months, weighed down by the global strengthening of the dollar in the aftermath of an aggressive Fed and the summer declines in crude oil prices.

At the end of September, the USD/CAD exchange rate hit 1.38, the highest level since June 2020, before easing to 136 as of October 5. 

With WTI prices above $85 per barrel, the Canadian dollar is trading at historically low levels against the US dollar, which means that USD/CAD may have overshot well above its fundamentals. 

Aside from the parenthesis of 2022, when WTI prices ranged from $85 per barrel to $111 per barrel between November 2012 and August 2013, USD/CAD was hovering around the level of parity.

Clearly, in the meantime, the US has also become a major oil exporter in recent years, and given the Fed's aggressiveness in hiking interest rates the scenarios are different now than they were back then. Therefore, despite trading at expensive levels relative to crude oil prices, USD/CAD may no longer be the best oil play on the forex market.

Even though its strength against the US dollar is somehow capped, the Canadian dollar may gain ground, especially against energy-importing currencies like the JPY, EUR, and CHF.

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1.05 Price
+0.440% 1D Chg, %
Long position overnight fee -0.0076%
Short position overnight fee 0.0030%
Overnight fee time 22:00 (UTC)
Spread 0.00006


136.33 Price
-0.530% 1D Chg, %
Long position overnight fee 0.0051%
Short position overnight fee -0.0116%
Overnight fee time 22:00 (UTC)
Spread 0.012


166.51 Price
+0.110% 1D Chg, %
Long position overnight fee 0.0000%
Short position overnight fee -0.0001%
Overnight fee time 22:00 (UTC)
Spread 0.033


0.67 Price
+0.630% 1D Chg, %
Long position overnight fee -0.0036%
Short position overnight fee 0.0007%
Overnight fee time 22:00 (UTC)
Spread 0.00006

Yield differentials continue to support CAD against EUR and JPY

2-year yields: Canada vs Germany vs Japan – Photo:, Source: Tradingview

Given its higher yields versus currencies like the euro and the Japanese yen, the Canadian dollar can continue to benefit from carry-trade flows.

A 2-year Canadian bond has a yield of about 3.8%, whereas 2-year bonds in Germany and Japan have yields of 1.6% and -0.7%, respectively.

In September, the Bank of Canada (BoC) raised its overnight rate by 75bps to 3.25%, the fifth consecutive rate hike, raising borrowing costs to the highest since 2008. 

BoC policymakers have also hinted at additional interest rate hikes given the inflation dynamic, with rates expected to reach 3.75% at the next meeting in October.

EUR/CAD daily chart

EUR/CAD technical analysis as of October 5, 2022 – Photo:, Source: Tradingview

EUR/CAD recently met resistance at 1,357, its highest level since late June 2022, as profit-taking emerged amid oversold RSI levels. 

Positive BoC-ECB rate differentials and high oil prices could continue to support the Loonie against the euro, renewing the downside pressure on EUR/CAD. 

A reversal of the short-term bull momentum that began at the end of August may see the 50-day moving average at 1,315 as an interesting first target in the short term, which, if broken, could extend the bearish pressure to 1,288 (2022 lows). If the downside does not materialize, a stop can be placed at 1,372 (June 2022 highs).

CAD/JPY daily chart

CAD/JPY technical analysis as of October 5, 2022 – Photo:, Source: Tradingview

CAD/JPY recently retraced from mid-September highs of 110.5 to 105.8. This level corresponds to approximately 23.6% of the Fibonacci retracement of the 2022 max-min range.

Despite the short-term bearish momentum, there is no clear reversal of the pair's major bull trend. Oil prices above $85/bbl, as well as large rate differentials between the Banks of Canada and Japan, may suggest accumulating on the Loonie's temporary weakness against the yen, with targets at 108.2 (September 22 high) before and 110.5 after and stop to be placed at 102.6 (15 August lows).

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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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