Iran, Oil and the Bank of Canada

July 16, 2015

The most recent agreement between world powers and Iran limits Iranian nuclear activity and lifts the crippling international economic sanctions imposed on them. This deal has a potentially massive impact on the price of oil with sanctions reportedly taking over 1 million barrels of oil supply out of the market.

In an attempt to gain a foothold back in the oil export market, Iran could undercut prices in an attempt to generate cash flow. The 700,000 barrels a day that Iran adds to the market could now have a huge supply side impact on the market.

We discussed the Oil Chart in yesterday’s Asian Session Morning blog, but I wanted to look at these charts again in a little more detail as we go through the impact that this deal will have.

Oil Daily:
oil3
Click on chart to see a larger view.

From a technical point of view, price has been in a massive down trend for over 12 months now. You can see that since January, price has consolidated at it’s lows but there has been no sustained buying and the bears are well and truly in control.

After reaching it’s first level of resistance, sellers have stepped back into the market and price is now targeting swing lows.

Oil 4 Hourly:
oil4
Click on chart to see a larger view.

Taking a look at the 4 hour chart, you can see the effect of the Iran deal on the price of Oil. When the deal was announced, the reality was that markets were ready for the decision and that it had been already priced in for a while now. Even though the deal meant that there would be more oil supply entering the market which should push the price down, it was a simple ‘sell the rumour, buy the news’ play.

With buyers not even able to break out of the short term range, I can’t see any move up being sustained and the play should be to look at selling any rallies from here.

With this historic deal, the fallout of changes in the oil market also effects individual economies and the price of their currency. One of the most sensitive to the price of oil is Canada.

Overnight, the Bank of Canada cut interest rates in an attempt to stimulate an export driven economy that is still trying to come to grips with an already low price of oil.

After previously cutting rates earlier in the year, Governor Stephen Poloz then indicated that the BoC wouldn’t need to cut rates again as the bank expected a recovery from the oil price crash during the first quarter. But as the economy deteriorated, ultimately Poloz felt that the BoC couldn’t wait any longer and moved to cut interest rates by 0.25%.

“One of the big shocks in this outlook is the downgrade of investment intentions by the companies in the oil patch.”

Again, after previewing USD/CAD in today’s Chart of the Day, let’s now have a further look at the USD/CAD charts in this context.

USD/CAD Daily:
uc5
Click on chart to see a larger view.

After reaching the upper band of the flag on talks of the oil price hurting the Canadian Dollar, the bulls took further control and price broke out higher. They managed to take price to the swing high resistance where we sat heading into the Bank of Canada decision.

USD/CAD Hourly:
uc6
Click on chart to see a larger view.

When the decision was made to cut rates, price broke through the resistance level that it was precariously hanging onto and has continued to look strong throughout today’s session.

It is going to be interesting to see if the increased oil supply that Iran provides the market actually will have a sustained effect on the price of oil and how that relates to commodity currencies such as the Canadian Dollar.

How are you looking to trade Oil and USD/CAD? Let us know by leaving a comment below or mention @VantageFX on Twitter.

Dane Williams – @VantageFX

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