The Crude Oil and Canadian Dollar correlation: USD/CAD, WTI
Joe Perry December 18, 2020 8:54 AM
If Crude Oil breaks lower, than the negative correlation suggests USD/CAD will move higher.
Since November 2nd, the USD/CAD has moved from 1.3350 to today’s low near 1.2688. During that that same period, West Texas Intermediate has moved from a low of 33.62 to today’s high hear 48.57. Crude oil is one of Canada’s largest exports, so it’s not surprising to see that the two instruments are correlated. The bottom of the daily USD/CAD chart below shows the current correlation between WTI and the Canadian Dollar. USD/CAD and Crude Oil are negatively correlated, meaning that when one instrument moves higher, the other moves lower. The current correlation between USD/CAD and WTI is -.87. For reference, when to instruments have a negative correlation of -1.00, they are considered perfectly negatively correlated and they move in opposite directions 100% of the time. A correlation coefficient of -.87 is considered a highly negative correlation.
Source: Tradingview, City Index
On the same chart above, USD/CAD has reached, and held, the 161.8% Fibonacci extension from the lows of September 1st to the highs of late September, near 1.2707. In addition, the pair has been forming a descending wedge since December 9th and could be ready for a possible move higher. The RSI has also barely moved back into neutral territory. If the pair breaks above the downward sloping channel line of the descending wedge, it could move back towards the highs of the pattern near 1.2833. Above there, price could move back up to previous support near 1.2980. (However, the overall trend is still lower, so watch for sellers there to try and push the pair lower.) Support is at the April 2018 lows near 1.2667.
Also since November 2nd, WTI has been moving higher opposite USD/CAD from a low of 33.62 to today’s highs near 48.57, including 4 consecutive days with a higher close. Price is forming an ascending wedge and is nearing horizontal resistance from February near 49.38. In addition, the 161.8% Fibonacci extension from the highs of August 26th to the lows of November 2nd is at 50.13, just above the psychological round number resistance of 50.00. The RSI has also moved into overbought territory above 72.
Source: Tradingview, City Index
Expectations of an ascending wedge are that price will break lower and retrace the wedge. With all the resistance above, price near the apex of the wedge, and the RSI overbought, it’s possible a reversal may happen sooner than later. Horizontal support is at 43.80 and 41.46, before reaching the bottom of the wedge near 40.11.
Therefore, if Crude Oil breaks lower, than the negative correlation with USD/CAD suggests that the currency pair will move higher. Throw in the setup of a bullish move in USD/CAD, the odds increase for the chance of a move higher.
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