Loonie vulnerable if OPEC upsets oil cart
FX Consultant / IFXA Ltd
- Muted reaction to mixed US data
- Opec meeting Thursday key for USDCAD
- Americans head home for the holidays
By Michael O’Neill
Today’s US data dump met with mixed reviews and a muted FX reaction. The weather may be partially to blame. Winter storm Cato (not the Green Hornet’s side-kick) could cause travel nightmares across the US east coast, sending the few traders in their New York offices home earlier than planned. US core PCE was modestly higher than expected but the impact was negated by an equally modest rise in jobless claims.
Upsetting the oil cart
It has been a long time since Opec meetings have attracted this much attention. This is largely because it has been a long time since the world has been awash in oil, or at least oil production. Oil traders and petro-currency traders are eagerly awaiting Thursday’s announcement. Will it announce production cuts and, if so, will the cuts be sufficient to put a floor under oil prices?
Reuters reported today that Saudi Arabia didn’t appear to be a big fan of major oil cuts while Russia refused to cooperate in any production cuts. Another major player, not at the table, is the US. Shale production of oil has contributed to the glut but fixing prices, of any kind, is a tad illegal in America.
Loonie and oil — an ‘on-again, off-again’ romance
The Loonie and WTI oil prices have had an “on-again, off-again” romance this year. After being together forever throughout October it appears that the bloom is off the rose. USDCAD/WTI have become estranged.
The Canadian dollar has eked out gains even as WTI plumbs new depths that may prove short- lived, again. A TD Bank report (Of Oil and Output) on the impact of falling oil prices in the Canadian economy concludes that “falling oil prices put modest downward pressure on Canadian output prices and the Canadian dollar”. The modest decline in the Canadian dollar hasn’t occurred for most of November, even as WTI prices made new lows, suggesting that the Loonie may take a turn for the worst.Chart WTI and USDCAD – note lack of correlation in November
Source: Saxo Bank
OECD sees early Canada rate hike
The Organisation for Economic Co-operation and Development (OECD) is forecasting that the Bank of Canada (BoC) will hike rates around mid-2015. This is about six months sooner than most domestic economists have predicted and probably a major factor in why FX traders ignored the report, which was released on Tuesday. The National Post debunked the OECD outlook, pointing out that Stephen Poloz, BoC governor, is on record stating that the bank would lag behind Fed rate hikes.
The OECD expects rising inflation to be the key driver behind a rate hike while the Bank of Canada (BoC) believes recent inflation pressures are temporary.
OECD Forecast BoC Forecast
GDP 2.6% 2.4%
Unemployment Rate 6.8% 6.3% Fiscal Balance negative 2.9% negative 1.4% Headline Inflation 1.9% 1.9%
Source: Organisation for Economic Co-operation and Development
The Canadian dollar has been relatively stable over the past month and is currently the best performing G10 currency against the US dollar. It is a rather impressive performance considering that oil prices declined steadily during this period. Key domestic data releases have been surprisingly strong. The list includes another blockbuster employment report and a large decline in the unemployment rate. Inflation continues to climb, posting a 2.4% year-over-year gain in October and Retail Sales were surprisingly robust. Taken together, the data paints a picture of the Canadian economic recovery gathering momentum in tandem with that of its neighbour to the south. A better-than-expected GDP report on Friday would support the recovery story.
However, the Bank of Canada’s view is a tad less rosy. The bank modestly downgraded its growth forecasts for 2015 and 2016. It remains concerned with an export sector that is less “robust” than in previous cycles, the slack in the labour market and the output gap. The BoC governor stated in his opening remarks to the House of Commons Standing Committee on Finance that “the economy has considerable excess capacity and that continued monetary stimulus is needed to close the gap”.
The Canadian dollar continues to be pressured due to concerns surrounding soft global commodity prices, an economic slowdown in China and the prospect of higher US rates sooner rather than later. At the same time, the possibility of renewed monetary stimulus by the European Central Bank (ECB) and the Bank of Japan (BoJ) has created a demand for the stable, higher yielding Canadian dollar. Demand for CAD against EUR, JPY and, to a lesser extent, GBP has offset general US dollar strength.
USDCAD remains in a steady, strong uptrend on the weekly chart from the September 2012 low of 0.9640, which comes into play at 1.0860. Currently, it is consolidating the November break above 1.1240 that led to the 2014 high of 1.1460. The daily chart shows a short-term descending channel bound by 1.1220 on the bottom and 1.1320 on the top. A move above 1.1320 suggests a retest of 1.1460 is on the cards.
The intraday technical picture is murky. USDCAD has been retreating in a choppy manner for the past month as evidenced by a series of lower highs but could not break below support at 1.1220, other than once for a very short-lived blip.
Source: Saxo Bank