What Do Collapsing Oil Prices Mean For FX?
Matthew Weller | Nov 04, 2014 10:13AM ET
As my colleague Fawad Razaqzada noted earlier today, oil prices are extending their recent collapse heading into today’s US session. The primary factors driving oil lower are the same ones your Economics 101 teacher droned on about during the first week of class: high supply (from Saudi Arabia increasing production) and low demand (from slowing economic growth in the Eurozone and China). In our view, the path of least resistance remains to the downside for oil.
…But What Do Collapsing Oil Prices Mean for FX?
Beyond the pure commodity trading realm though, the dramatic drop in the price of oil has big implications for forex traders as well. The currencies of countries that rely on oil exports (prominently Canada, Norway, and Russia) are being sold particularly aggressively. We already covered USD/RUB in yesterday’s EM Rundown report, but both USD/CAD and USD/NOK deserve a closer look.
USD/CAD: Could 1.15 or 1.16 Be in Play This Week?
After initially consolidating below 1.1300 yesterday, USD/CAD has been in full rally mode for the past 24 hours. From a fundamental perspective, the pair’s oil exports are being hit from two directions, with the falling global price of oil and the the increase in US energy production decreasing the volume of Canadian oil exports.
As we go to press, rates have just broken out to a new 5-year high above 1.14, and frankly the unit looks like it may have further to run in the short term. The MACD indicator has turned back positive after consolidating the last two weeks, and the RSI indicator remains firmly in bullish territory, though not yet overbought. From here, rates may continue to rally toward key psychological resistance at 1.1500, and if oil prices continue their freefall, an eventual move toward previous resistance in the mid-1.16s is possible by the end of the year.
Source: FOREX.com
USD/NOK: Testing Resistance At 6.8630, but Breakout Could Target 7.30 Next
The rally in USD/NOK has been even more impressive. The pair has been consistently hitting new highs for weeks, helped along by a large monetary policy divergence and the aforementioned drop in oil prices. Now, rates are testing the 78.6% Fibonacci retracement of the 2009-2011 drop at 6.8630.
Having run much further in the past few weeks, USD/NOK may be more vulnerable to a near term pullback this week, especially with the RSI indicator deeply overbought. That said, a move above the 6.8630 level could pave the way for a continuation toward psychological resistance at 7.00 or even the 11-year high near 7.30 in time.
Get The News You Want
Source: FOREX.com
For more intraday analysis and market updates, follow us on twitter (@MWellerFX and @FOREXcom).
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.