Rebounding energy prices likely to boost Canadian dollar



...especially against haven currencies such as the Japanese yen, following the vaccine news...



Oil prices came off their best levels a few moments ago, in response to an unexpected build in US crude oil stocks. I am not sure if the weakness will persist for too long given that a large build should have bee expected after the API had published its figures the day before. Although there are also some fears about rebounding Libyan oil supply, reports that that the OPEC+ is thinking to delay an output hike planned for January should offset those fears. But the biggest driver behind oil prices is likely to be optimism over rebounding demand, thanks to the vaccine news, as I reported yesterday in THIS article.

Indeed, after this week’s big turning point for risk assets on the back of news of the Pfizer-BioNTech vaccine, it is worth looking out for bullish setups to emerge on stocks indices, energy prices and emerging market currencies. For the first time since the pandemic, there is now hope and light at the end of the tunnel that coronavirus restrictions that have been imposed across the world could soon be over, even if currently there is still no end in sight for the surging coronavirus cases across the West.

As well as value stocks – those that had been badly hurt by the pandemic, especially in the hospitality and travel sectors – we are seeing most assets that rely on economic growth rebounding – including oil and gas prices. The thinking is that as lockdowns and restrictions ease, more and more people will travel, and this will boost demand for crude oil and crude products.

Canadian dollar should get a lift from rising energy prices

If energy prices sustain their gains, then this should provide a lift for the Canadian dollar in particular, given that crude and gas exports make up a bulk of Canada’s GDP.

The Canadian dollar surged to a two-year high against the US dollar on Monday, before easing back on profit-taking. But given the above fundamental considerations. The commodity dollar could find renewed buying interest around current levels.

CAD/JPY bull flagging

In fact, playing the CAD’s potential strength against a safe haven currency like the Japanese yen may result in better performance – for as long as risk sentiment remains overall positive. So it is definitely worth keeping a close eye on the CAD/JPY as rates consolidate inside this bull flag pattern:

CAD/JPY
Source: ThinkMarkts and TradingView.com

As the 2-hour chart shows, rates are drifting lower after Monday’s big upsurge. But do watch the above shaded zone for the buyers to potentially step back in. This region was previously resistance, and now that it has been broken, this makes it likely that it would turn to support.

Alternatively, waiting for a breakout above the bull channel also makes technical sense.

Either way, the path of least resistance is to the upside and the weakness we have observed over the past couple of days may prove to be short-lived, given the above fundamental considerations.



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