Saudi’s decision to limit oil exports strengthens Loonie

Improved economic outlook and hint of another rate hike by the Bank of Canada enabled the Canadian dollar to rally against the Yen for the past one-and-a-half month.

The Yen was also weakened by an increase in the unemployment rate in May. Due to reasons given below, we forecast the CAD/JPY pair, which is trading at 89.48, to rally further.

Earlier this week, at the sidelines of OPEC meeting held in St.Petersburg, the Saudi and Russian energy ministers discussed about the production cut agreement, which was recently extended until March 2018.

After the meeting, Saudi energy minister Khalid al-Falih stated that the crude oil exports from his country would be limited to 6.6 million barrels per day. That corresponds to a decline of about 1 million barrels per day from last year level.

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Alexander Novak, the Russian energy minister, opined that a 100% compliance with the production cut agreement would mean a removal of another 200,000 barrels per day of oil from the global oil market. Notably, the Ministers underlined that OPEC and other oil producing members are fully committed to the production cut agreement and even an extension would be considered, if necessary.

Even Nigeria has indicated that it would cap production after reaching a level of 1.8 million barrels per day. The positive news has boosted Brent crude to $48.50 levels. Canada (& the Loonie) stand to gain from an increase in the price of crude oil.

According to Statistics Canada, wholesale sales increased 0.9% m-o-m to $61.6 billion in May, compared with 0.8% growth in the previous month, and above the market’s expectations of 0.5% growth. Miscellaneous goods, motor vehicle and parts contributed the majority of the growth. The wholesale sales increased 0.8% in volume terms.

In the July monetary policy meeting, in line with analysts’ estimates, the Bank of Japan maintained the benchmark rate of -0.1%. However, for a sixth time, the central bank’s governor Kuroda postponed the target time for achieving 2% inflation rate. The time is now set to 2019. Notably, the BoJ also slashed its inflation forecasts for fiscal 2017 and 2018. The inflation rate is expected to decline to 1.1% in FY17, from the earlier forecast of 1.4%. Likewise, the inflation rate for fiscal 2018 is now expected to be 1.5%, against the prior outlook of 1.7%. The Yen remains weak on these developments.

As seen in the image below, the pair has broken the resistance at 88.91. The CAD/JPY pair has not violated the ascending channel as well. Furthermore, the rising MACD indicator confirms the prevailing bullishness. Thus, technically, a continuation of the current rally can be expected.

By taking a long position in the CAD/JPY pair, we wish to benefit from the forecasted uptrend. Preferred entry and exit levels are 89.20 and 91.20. To limit losses, a stop loss order would be placed below 88.40.

To create a similar setup in the binary market, we are considering investing in a high or above option. We would enter when the pair trades near 89.20, provided the offered call option is valid for one week.