Last week we had a huge gain in oil inventories. Now, in theory, that should have held oil lower. However, in reality, the reverse happened.
This tells me that traders are looking to the improvement in GDP numbers lately (particularly that of the U.S.) and how it will effect the demand that’s placed on oil supplies as economies start to actually grow once again (rather than contract).
This has pushed USD/CAD past through what some had thought would be a double bottom. In some of my writings, I’d been cautioning against that thought of a bottom because the fundamentals of many countries have been improving for 3-4 months running now.
So one has to ask themselves…if things are improving and the likelihood for a “return to growth” is around the corner, then what should that do to oil? It should take it higher. Well, that’s bad for the U.S. dollar and at the same time, good for the Canadian dollar since Canada exports tons of oil.
It’s bad for the U.S. dollar because oil is priced in dollars and the two (over time) tend to head in opposite directions. The U.S. Dollar Index has been diving ever since March and its trend is (and has been) downward since then. That trend is unlikely to change.
Therefore, after “dollar rallies” start to fade, they should be shorted (in my opinion) since the main “dollar trend” is downward.
This will likely take USD/CAD back to parity (1.0000) sooner rather than later. It wouldn’t surprise me if we see this reached in the coming weeks to month or two maximum. Click on the chart below to enlarge it.
Don’t try to “catch a falling knife”. Counter trend traders are the food for trend traders. Don’t get caught up in being a counter trend trader and therefore placing the odds against you. Become a “trend trader” and place the odds in your favor.
Sean Hyman
www.forextradingblog.com
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