US Crude Oil and USDCAD Push Synched Range Swings Ahead of US CPI

Crude Oil, Open Interest, Sentiment, USDCAD and CPI Talking Points:

• The Market Perspective: Crude Oil Range Between 82.50 and 72.50
• US-based WTI crude futures have moved up to trendline resistance that stretches back 8 months, but both retail and large speculative interests seem to believe in the ceiling
• The correlation between US oil and USDCAD is an assumed common, negative relationship; but this Dollar-pair is one of the less responsive pairs to recent CPI volatility

There is an unease in the markets that seem to be associated to the anticipation of Tuesday’s top event risk: the US CPI release for January. There are a number of considerations that this well-known inflation indicator can tap into – including Fed rate forecasts and core economic potential – but can it conquer all technical ranges that have developed these past weeks? Two assets that sport robust congestion patterns and carry a limited track record when it comes to the response after previous inflation updates are the popular WTI crude oil futures contract and USDCAD.

In the case of US-based crude, there is a grand technical picture and a core fundamental connection to the outlook for economic health. The demand side of the value equation for oil is a reflection on the growth potential for the world at large – and perhaps the United States specifically. As fears of an impending recession for both the globe and its largest member economy ebb, the appetite for the basic commodity ‘powering’ expansion would theoretically look brighter – which in turn could be construed as a bullish pressure for oil. However, the full commitment on a genuine economic upswing is still uneven at best. Furthermore, there are supply-side considerations as well. Perhaps in response to Russian discussions of crude output reductions or in advance of Tuesday’s CPI release, the White House reportedly plans to sell 26 million barrels from the Strategic Petroleum Reserve (SPR) in accordance with a previously approved dispersal for the current year. For the time being, the news seems to have kept WTI below the trendline resistance at 80.00 and further the 100-day SMA at approximately 81.00.

Chart of US WTI Crude Oil Futures, Volume, 100-Day SMA, 20-Day ATR and Spot-100 SMA (Daily)

Chart Created on Tradingview Platform

While resistance may have been reinforced by mixed view between demand and levels of supply, an eventual break is inevitable. On any chart pattern where resistance and support intersect (triangle, wedge, etc), there will be a point where the market will move out of the pattern. Of course, reaching the mere ‘terminus’ of a convergence doesn’t inspire much in the way of follow through. It is better served if charged by a tangible fundamental shift. It isn’t clear what that systemic change would be that could be relied upon for a trend discovery, and that may reinforce in the short-term the market’s penchant for the range. From the larger speculator class measured by the CFTC’s Commitment of Traders (COT) report, the net long position of approximately a quarter of a million contracts is near the lowest we have seen from the group in 7 years. Alternatively, retail interest via IG CFD trading is very distinctly catering to the swings. While still a net long position, the 65 percent positive position is well off the past month’s peaks that have aligned to swing lows in oil.

Chart of US Crude Oil Overlaid Retail Speculative Positioning at IG (Daily)

Chart Created on DailyFX

When it comes to crude oil, there is a historical correlation that is often made to the performance of the USDCAD exchange rate. The foundation behind the connection is the proposition that Canada is a major exporter of commodities, including crude; while the United States is one of the largest importer of raw materials including petroleum products. That is generally true, but the scale of supply from Canada to the US is not a defining feature of the cost for a commodity that is globally priced – and carries a lot of association to the pricing determined owing to an inflows of raw material into a small city in Oklahoma, if we want to get technical. Statistically, we can see the correlation between the two (crude is inverted with the 20 and 60-day relationships below). USDCAD is technically near the floor of its own descending triangle pattern, but has enough distance to the ‘zone floor’ between 1.3200-3250 that it could absorb a CPI surprise before it gets to a boundary for a break.

Chart of USDCAD Overlaid with Inverted US Crude Oil, 20 and 60-Day Correlations (Daily)

Chart Created on Tradingview Platform

Through recent history, USDCAD has experienced the volatility associated to the US CPI release like most Dollar-based majors However, the effectiveness of the technical charge raises questions. The August release on September 13th generated a big Dollar rally, but the break above 1.3200 only happened days later and in a less-than-distinct manner. The dramatic October drop in inflation reported on November 10th would also lead to a big drop for USDCAD, but that was where former resistance at 1.3200 because new support. Looking to retail active these past 8 months, it seems traders are very comfortable in trading with the range. It would be a shock for them – and myself – if this upcoming event catalyzed a genuine break.

Chart of USDCAD Overlaid Retail Speculative Positioning at IG (Daily)

Chart Created on DailyFX