A strengthening dollar is unlikely in coming weeks. This opens the door for Oil to rally ahead of the March 21 FOMC Policy Statement, and in turn allows the TSX to outperform the S&P 500, writes Ziad Jasani of the Independent Investor Institute Monday from Toronto.
Industrial Input Commodities: Oil was setting up for a move up into the close on Friday, Feb. 16, but did not present a technical break above resistance to confirm. On Feb. 19, Oil futures have indeed taken out resistance of $61.93 and is on path to $63.09 or higher.
The key issues Oil faces over the next month are increases in US shale production, whether OPEC/No-PEC’s production shut-ins will be renewed and the launch of the petro-yuan to extricate the USD from Oil trade.
• Implication #1: Remain long Energy Equity bounce trades picked up Feb. 9 or thereafter, but consolidate Energy Equity Holdings to the large cap ETFs like XEG-T or XLE, with preference for XEG-T as a stronger USD implies a weaker CAD and adds a bit of top-spin to the Canadian side.
• Implication #2: Oil has the potential to re-test calendar year highs of $66.66 or higher if any further rises on the USD remain tepid, which is the likely outcome from the release of the Federal Open Market Committee Minutes Wednesday and the ECB Minutes Thursday. The current correlation between Oil and the USD in the last 30-day period is -28% and -83% in the latest 60-day period. Sharp moves up on the USD would hurt Oil.
• Implication #3: The idea of the USD strengthening dramatically is a lower probability for the next 15-20 days ahead of the March 21 FOMC Policy Statement (where a 25bps hike is expected, and potentially a more hawkish tone from the Fed).
This opens the door for Oil to rally ahead of the March 21 FOMC Policy Statement, and in-turn allows the TSX to outperform the S&P 500.
But Emerging Markets priced in USD (EEM) is more likely to under-perform Canada (XIC-T).
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