Trading the Recent Divergence of the Canadian Dollar and Oil Prices - ONE-TWENTY TWO: Trading Financial Markets

(This is an excerpt from an article I originally published on Seeking Alpha on June 8, 2015. Click here to read the entire piece.)

Over the past month the Canadian dollar (FXC) has significantly diverged from oil prices.

Over the past month, the Canadian dollar (vs the U.S. dollar) has notably weakened even as oil prices have stabilized

Source: The St. Louis Federal Reserve

This divergence is not a surprise given the weak correlations between the currency and oil prices since at least 2008. However, the sharpness of the divergence since mid-May IS a surprise that I do not think will sustain itself for much longer. {snip}

U.S. jobs data reawakens the U.S. dollar but overhead resistance remains firmly in place

Source: FreeStockCharts.com

{snip}

Over the past two weeks, the Canadian dollar has stabilized against the U.S. dollar. This sideways action followed two weeks of persistent weakness

Source: FreeStockCharts.com

{snip}

GDP growth in Canada has taken a sharp turn downward

Source: Statistics Canada

Of the biggest drivers of the negative GDP print, exports concern me the most since it implies that a weaker Canadian dollar did not deliver as expected and hoped. {snip}

This export performance added to a fourth quarter in a row of declining terms of trade for Canada. {snip}

The jobs report is also a source of optimism. {snip}

The current “stalemate” comes right back to oil then as a possible “tie-breaker” until the next refresh for GDP and jobs. {snip}

In 2015, the gains of FXC over USO have come to halt and settled into a trading range

Source: StockCharts.com

Since the Canadian dollar and oil typically do not experience persistent divergences, I am expecting the Canadian dollar to regain some strength in the short-term even if oil just remains stable. Such a move would be consistent with a return to the top of the current trading range. Of course, this adjustment could also happen with fresh weakness in oil, so I am also on alert to trade USO bearishly if it breaks below recent lows. I am assuming that a fresh bounce in oil prices would be an unqualified positive for the Canadian dollar.

{snip}

A rare window of relief from negative bets against the Canadian dollar

Source: Oanda’s CFTC’s Commitments of Traders

Be careful out there!

Full disclosure: long FXC

(This is an excerpt from an article I originally published on Seeking Alpha on June 8, 2015. Click here to read the entire piece.)

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