higher crude oil price support Canadian dollar as deflation arrives

  • The USD/CAD pair declined after Canada released weak inflation numbers.
  • The headline inflation declined by 0.7% year on year while core CPI rose by 1.2%
  • The Canadian dollar was supported by higher crude oil prices.

The USD/CAD declined by more than 45 basis points as the market reacted to positive crude oil prices. Investors ignored the weak inflation numbers from Canada.

Canadian dollar
USD/CAD declines after weak CPI data

Canada inflation disappoints

It seems like all developed economies are facing deflationary pressures. Earlier today, I wrote about the disappointing consumer prices data from the United Kingdom and the eurozone.

Canada is doing worse. According to Statistics Canada, the headline consumer prices declined by 0.2 per cent year on year. This was lower than the -0.1 per cent that analysts polled by Bloomberg were expecting. It was also the lowest level since August 2009, at the height of the previous financial crisis. The prices declined by 0.7 per cent from March.

The closely-watched core CPI declined by 0.4 per cent in April. It rose by 1.6 per cent year on year. The core CPI excludes the volatile food and energy products. The median and trimmed CPI remained unchanged at 1.8 per cent and 2.0 per cent respectively.

According to Statistics Canada, gasoline was the biggest contributor to the deflation. The price of gasoline fell by 39.3 per cent year on year, the largest decline on record. This was mostly due to the sharp decline in crude oil prices.

Other contributors to weak prices in Canada was low clothing and footwear, which fell by a record 5.9%. Education and reading prices fell by 0.7%. This decline was offset by higher food prices. The price of rice rose by 9.2% while eggs rose by 8.8% on a YoY basis. Also, the price of household cleaning products and toilet paper also surged. In a statement, the department said:

“On a monthly basis, the household cleaning products index rose 4.6%. The paper supplies index, which includes toilet paper, increased 6.0%, the largest monthly increase in this index on record.”

Higher oil prices support the Canadian dollar

Canada is the fourth-largest crude oil producer. As a result, the Canadian dollar (and USD/CAD) tend to be affected by higher oil prices.

The price of Brent and West Texas Intermediate (WTI) rose by more than 2 per cent. Brent is trading at $36 while WTI is trading at $33 respectively.

The price of oil has been boosted by the perceived increase in demand as countries start to reopen. According to Bloomberg, demand from China has returned to the pre-coronavirus levels. At the same time, supply is starting to drop.

Data from Baker Hughes showed that US producers have reduced their active rigs to above 200. Another data by the American Petroleum Institute (API) showed that inventories in the US reduced by more than 4.5 million barrels.

Crude oil price
Brent and WTI crude oil price rises

The USD/CAD is down by 0.45% while other oil currencies like the Mexican peso and Norwegian krone have gained by 1.15% and 0.27% respectively.

USD/CAD technical outlook

USD/CAD technical forecast

USD/CAD is trading at 1.3880. On the daily chart, the pair is at a critical point as you can see above. The price is slightly above the important support at 1.3846. It is also forming a descending triangle pattern and has just moved slightly below the 50-day EMA. Therefore, a move below 1.3846 will mean that bears have prevailed. As such, the USD/CAD pair will then attempt to test the next support at 1.3800.


Notify of
Inline Feedbacks
View all comments