What Freefalling Oil Prices Mean for CAD

US oil prices fell as much as 5% in the largest one-day decline since 2012. Not coincidentally, the Canadian dollar hit a 5-year low while the yen continued to outperform. Up next is Chinese CPI. 3 out of our 4 Premium GBPJPY and GBPUSD trades hit all their targets, with 280 pips in both cable trades issued last night and 180 pips in GBPJPY issued on Oct 9th. 

The rout in oil prices started Monday when Saudi Arabian officials said they could to tolerate $80 oil. That was compounded today when the EIA lowered global demand forecasts.

What had been a disorderly decline briefly turned ugly as WTI prices dropped to $81.33 from $84.25 in 30 minutes. Worries about global growth are mounting but the swan dive from $107 has pushed the daily RSI to a post-Lehman extreme.

At the same time oil was falling, USD/CAD broke above the 2014 high of 1.1278 and continued to rally to 1.1313 – the highest in more than 5 years. Technically, there is little in the way of the pair until 1.17 and with commodity prices in full retreat, the picture is intriguing.

What's important to keep in mind, however, is that Canadian oil isn't priced in WTI but rather Western Canada Select. That benchmark is at the lowest since Dec at $72 but it remains far about the 2013 low of $52 and the 2012 low of $45. In other words, we're not yet at the point where oil prices are a major drag for the loonie.

In the broader trading picture, the story remains high volatility. The pound sold off heavily on soft CPI data and the euro slumped on the ZEW. Importantly, the euro was able to hold the European lows, while cable broke below 1.5900 late in the day.

The focus now shifts to China with September inflation data due at 0130 GMT. The CPI is expected to rise 1.7% y/y and signal that officials have plenty of room for stimulus.

So far, China hasn't signalled that it's willing to do more but a change in rhetoric if CPI is lower than the 1.7% reading expected could be the spark that helps turn around risk assets.