Oil and the Canadian Dollar

As a confirmed crude oil bull, who has been bullish on the commodity since early 2010, the recent breakout about $100 per barrel, following the long sideways consolidation of last year, has come as no surprise and now added some much needed momentum to the market, and as I mentioned in one of my posts from earlier in the year, I expect to see crude oil develop a sustained and firm trend higher for much of 2011. In fact, with silver, it could be one of the star performers! The technical picture for oil remains extremely positive, with the WTI spot market now trading at $104.76, and well above all of the short and longer term moving averages on the daily chart, and despite the pause of the last two days, with a brief pullback today on the oil inventories, which showed a build of 2.5M barrels, this appears to have had little impact, with only a minor correction on the news, as global conflicts and unrest in the Middle East continue to dominate the energy sector. Even OPEC’s recent hints at an increase in production seem to have had little impact.

Now, naturally whilst one can trade oil itself in many ways, and indeed my favoured approach is to use the futures market, there are other, perhaps less obvious approaches, and one of these is of course to trade in the forex markets, with one of the so called commodity dollars, of which the Canadian dollar is a classic example. Canada is one of the richest countries in terms of natural resources, and is the sixth largest producer of oil, with the still largely untapped Alberta Sands, now a profitable proposition once more, as oil moves above the key $75 per barrel region at which extraction and refining becomes a profitable operation. As a result, with oil expected to move higher, the knock on effect for the Canadian dollar against other currencies is generally positive, and we can already see evidence of this with the Canadian dollar strengthening against both the US dollar, as well as the UK pound. Indeed, this is a position I opened yesterday with a short on the GBP/CAD, opening at 1.5720 with a stop loss above at 1.6004. with the pair now trading below all five moving averages on the daily chart, and with yesterday’s attempt to rally finding resistance at the 9 day moving average, the short term outlook remains bearish for the pair, and I expect to see a move towards a test of the 1.5300 low of early January in due course, with the resistance above providing a strong barrier to any short term move higher. With oil continuing to look bullish I anticipate that this factor will exert greater leverage in the pair, rather than any potential rise in interest rates for the UK pound in the next few months.