CAD Strengthens on USMCA | The Natural Gas Rally

The first week of the new month and quarter is off to a busy start. There have been three main forces driving trading action in North America so far this week. First, the positive resolution of trade talks between the US and Canada, sparked a rally in Canadian automotive stocks which had been under the threat of tariffs and also in the Canadian Dollar. Second, indications of strong global demand for energy and reduced oil exports from Iran due to sanctions have sparked continued interest in energy commodities with WTI crude oil breaking out over $75.00/barrel and Brent Crude building on last week’s breakout over $80.00/barrel. Third, it’s a big week for economic data, most recently a vert strong US ADP payrolls report (growth of 230K was way above street 185K), setting the stage for Friday’s big US nonfarm payrolls and Canadian employment reports.

In this issue of Equity Leaders Weekly, we take a look at the impact of all three forces on the Canadian Dollar. We also take a look at the price of Natural Gas, which has been attracting seasonal interest with winter approaching (and already arriving in some places).

United States Dollar / Canadian Dollar (USDCAD)

Currency prices are affected by a number of factors including differences in interest rates, political developments and the economic outlook for the country or region in question. The Canadian Dollar, for example, tends to be influenced by energy prices (Canada is a big oil exporter), trade relations with the US (who is Canada’s primary export customer) and Canadian interest rates.

This week, all three factors are actively influencing the Loonie. In recent months, fractious trade talks between the US and Canada, uncertainty over whether a new deal could be reached and the negative implications for Canada’s economy if talks failed and a trade war broke out. With the US and Canada reaching a deal to proceed with a new three-way agreement with Mexico to be called USMCA, the pressure of trade uncertainty on the Canadian Dollar dissipated, contributing to this weeks’ Loonie rally.

Just as the biggest headwind against the Loonie eased on Monday, CAD also picked up a tailwind from energy prices. Oil has started to climb once again in recent weeks, a positive for oil sensitive currencies like CAD. With Brent breaking out over $80 last week and WTI breaking out over $75 this week, a new upswing in oil prices may continue to benefit the Canadian Dollar.

As we move toward the end of the week, the third factor, interest rate speculation may move into the spotlight. The Bank of Canada has already raised interest rates twice this year, and Friday’s Canadian Labour Force survey may provide an indication of how much pressure Governor Poloz is under to raise rates again before the end of the year. With the US Fed having raised US rates last month, a positive report could stoke speculation of a Canadian rate hike at one of its next two meetings; October 24th or December 5th.

With the Canadian Dollar attracting renewed interest this week, USDCAD has broken down below $1.2849 to complete a Double Bottom and signal the start of a new downleg. (In forex it is the price moving up and down is in the first currency, and the second currency does the opposite, so USDCAD falling means the Canadian Dollar is strengthening against the US Dollar) With a bearish SMAX score of 5 USDCAD is exhibiting near term weakness against the asset classes. Next potential downside support appears near $1.2595 where a horizontal count and trend line converge, followed by the $1.2500 round number and $1.2470 a previous support level. Initial resistance may appear near the $1.3000 round number of $1.3108 based on a 3-box reversal.

Natural Gas Continuous Contract (NG.F)

Although rallying oil prices have attracted the most public attention lately, the natural gas price has also started to climb once again. Natural Gas often attracts attention in the autumn as investors start to anticipate the winter home heating season, which is the peak time of the year for natural gas demand. This is a similar demand pattern as Heating Oil which we discussed in the September 6 issue of Equity Leaders Weekly.

Earlier this year, a downtrend in Natural Gas bottomed out near $2.50/mmbtu and since then the price has been trending upward. Recent breakouts over $2.94 to snap a downtrend, $3.00 to clear a round number hurdle and $3.03 to complete a bullish Spread Double Top combine to confirm renewed accumulation. A perfect SMAX score of 10 indicates that natural gas is exhibiting near term strength across the asset classes.

Natural Gas has advanced to break through a series of previous peaks near $3.09 with next potential resistance after that possible near $3.28 then $3.42 based on previous column highs and lows. Initial support appears near $3.19 then $3.09.

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