The Canadian dollar started the week on a good note regaining some lost ground versus the US dollar. The loonie traded higher on Monday after Saudi Arabia and Russia backed an extension of the oil production cut agreement. The Organization of the Petroleum Exporting Countries (OPEC) made a deal with other major producers last year and started cutting in 2017. The deal was for only six months, but not an extension taking it to March 2018 has been backed by Russia. The Canadian dollar has a correlation of 0.75 with oil prices.
The surge in oil prices took place at the same time that the US dollar is failing to get traction after political turmoil after U.S. President Donald Trump fired FBI director Commey. In Canada the Home Capital Group story is getting less play as even the Bank of Canada (BoC) Governor said the problems are contained. Resale prices were 1.7 percent lower in April according to the Canadian Real Estate Association in what could be a sign that prices are finally cooling in Canada with listings growing by 36 percent in the same month in the Greater Toronto Area. Listing were up 10 percent nationally also pointing to a shift from a sellers to a buyers market.
The USD continues to have the support of the U.S. Federal Reserve. Fed members kept talking up the chances of more rate hikes this year. They market is pricing in a 73.8 percent probability of a rate hike in June according to the CME’s Fedwatch tool. Economic data has been mixed with the latest retail sales and inflation numbers released on Friday disappointed by not meeting forecasts, but are still moving in the right direction.
The USD/CAD lost 0.483 percent on Monday trading. The price of the currency pair is trading at 1.3646 after comments from Russia and Saudi Arabia boosted the price of crude. The Canadian dollar has faced an uphill battle in 2017. The combative tone of the Trump administration towards NAFTA and trade imbalances with the US has put the loonie under pressure. Oil prices have struggled to break free of the downward pressure caused by lack of demand and ramping production from non-OPEC members like the US and Canada. Interest rates are expected to keep going higher in the US while the Bank of Canada (BoC) is not anticipated to hike rates until 2018 leaving a growing gap between the two that will favour the USD.
The currency went below the 1.37 price level, but in order to continue appreciating versus the USD, the CAD has to find additional support from economic fundamental. The releases later this week of retail sales and inflation data will be crucial to guide the direction of the Canadian dollar.
The price of energy surged 2.832 percent on the last 24 hours. West Texas is trading at $49.06 following the OPEC deal comments. The apparent deal between Russia and Saudi Arabia to extend the OPEC deal into 2018 is a huge shot in the arm for crude prices that have struggled with stagnant demand and increasing production from US shale producers.
Russian participation was a question mark as the six month deal is near the end. Private companies had to meet the Russian Minister of Energy as the first six months of the year are not as crucial as the second half. The weak dollar and the deal extension will keep crude in current levels until there are signs that demand is still soft as per the weekly US crude inventories to be released on Wednesday.
Gold rose 0.246 percent. The price of the yellow metal is trading at $1,231.05 after risk aversion triggered by the situation on North Korea and the political instability in the US have investors looking for a safe haven. The missile test in North Korea just after the Japanese PM had praised the Trump administration for its handling of the situation has made gold more attractive to investors looking for safety.
Commodities in general were higher after China added $100 billion to its infrastructure spending
Market events to watch this week:
Sunday, May 14
6:45 pm NZD Retail Sales q/q
10:00 pm CNY Industrial Production y/y
Monday, May 15
9:30 pm AUD Monetary Policy Meeting Minutes
Tuesday, May 16
4:30 am GBP CPI y/y
8:30 am USD Building Permits
6:45pm NZD PPI Input q/q
Wednesday, May 17
4:30 am GBP Average Earnings Index 3m/y
8:30 am CAD Manufacturing Sales m/m
10:30 am USD Crude Oil Inventories
9:30 pm AUD Employment Change
9:30 pm AUD Unemployment Rate
Thursday, May 18
4:30 am GBP Retail Sales m/m
8:30 am USD Unemployment Claims
Friday, May 19
8:30 am CAD CPI m/m
8:30 am CAD Core Retail Sales m/m
