As my colleague Fawad Razaqzada noted earlier, crude oil has turned lower Wednesday afternoon, despite yet another dip in stockpiles. With the US oil contract (West Texas Intermediate) testing major resistance at its 200-day MA for the first time since July, there is risk that oil could roll over and pull oil-dependent currencies with it down with it.
Enter the Canadian dollar, which is supported by the world’s sixth largest oil-producing economy and the largest single exporter of oil to the United States. The loonie has been sold heavily on the back of Wednesday’s reversal in WTI, with USDCAD hitting a two-week high above 1.2400 and CADJPY, the subject of today’s piece, dropping back through the century mark at 100.00.
CADJPY’s rally has been showing signs of stalling since the beginning of the month, when the pair failed to break above the 61.8% Fibonacci retracement of the Dec-Jan drop at 100.85. For the last three weeks, rates have been consolidating in an extremely tight 100-pip range, but there are multiple signals that Wednesday’s breakdown could lead to a more significant move. Most clearly, rates are carving out a large Bearish Engulfing Candle* on the daily chart, signaling a big shift to selling pressure and foreshadowing a potential continuation lower. In addition, the 14-period RSI indicator formed a bearish divergence at the last attempt to break the 100.85 level; this development showed a lack of momentum behind last week’s rally and increases the probability of a more significant top forming.
In the short-term, bears will be looking for a close below the 100.00 level today to confirm the breakdown. From there, sellers may look to drive CADJPY down toward previous support and the 200-day MA at 98.50 or lower. Overall, the near-term bias in rates will remain lower beneath major resistance near 101.00
*A Bearish Engulfing candle is formed when the candle breaks above the high of the previous time period before sellers step in and push rates down to close below the low of the previous time period. It indicates that the sellers have wrested control of the market from the buyers.