USDCAD is one of the most highly oil dependant pairs since both countries are major exporters of Crude oil, CAD being even more oil price dependant. Recent collapse of the oil market prompts to take a closer look at the short-term and long-term view.
Looking at the weekly chart with applied Elliott Waves since 1994 we see that USDCAD is currently in wave 3 of wave V up. Long term view suggests that this pair will go much higher, potentially surpassing all time high of 1.6185 from January 2002.
Starting from 2002, the world enjoyed rapid growth and high demand in developing countries. And the start of Iraq was, all those factors contributed to the start of the ‘Oil Bubble’. The demand for oil skyrocketed as well as its price. Rapid growth in oil demand pushed prices of oil and value of CAD, and USDCAD reached the lowest point before the 2008 crash at around 0.90, completing the ‘(a)-(b)-(c)’ correction move down. As growth returned in 2012, wave analysis shows a ‘I-II-III-IV-V’ formation up. Current count suggests we are in wave 3 of V up. The latest spike was prompted by the start of pandemic, leading to the collapse of the oil market.
Elliott Waves show we are now starting wave iii of 5 after finishing wave 4 in a flat ‘abc’ correction. Now need the break and close above the red resistance area and downtrend line for confirmation of the next bullish move. This count is valid if 1.40 area holds without forming new lows. The FOMC meeting on Wednesday could create high volatility for the pair, so requires caution during those times.
The current weekly chart is compared with the price of WTI (yellow line). It clearly shows the inverse correlation of USDCAD and WTI. While oil market reached bottom, the wave analysis suggests that CAD will only get cheaper, prompting us to consider that the oil market will not be the same as it once was even if OPEC+ and USA manage to fix it somehow. The current pandemic environment and lockdown create demand shortages and massive oversupply. Even if the cities start opening, it will take more time for borders to properly open and demand to return to normal levels. Canada exports its lion share of oil into USA, its main trading partner. With USA being so seriously hit by the pandemic, the outlook for trade is negative at the moment.
As Bank of Canada followed the FED and lowered their interest rates to their lowest levels, currency is at a very vulnerable point with oil prices down as well. Considering recent developments, it is unclear when the interest rates can be raised again. With all of this, they could be forced to employ even more serious QE measures, simply having no other options left. Flooding the market with cash to sustain it. That is pretty much what the rest of the world is doing right now. So, the outlook for CAD remains quite bleak.
Overall, we are waiting for lockdown easing measures to help jump start the consumption again. But that will take time and with Canada’s closest trading partner, USA, being the worst place hit by the virus right now, the timelines are very uncertain.
Good Luck and Stay Healthy!