The Canadian dollar appreciated on Wednesday with the bigger than expected drawdown in weekly US crude inventories reported by the Energy Information Administration (EIA). The loonie alongside other commodity currencies were the biggest winners against the USD.
The high correlation between the CAD and the price of oil meant that as the market was unsure of how much an extension to the Organization of the Petroleum Exporting Countries (OPEC) production cut agreement would boost prices the currency had no support while battling on up to three different fronts. The Trump administration had increased the combative rhetoric and sprung into action with tariffs against the Canadian lumber industry in the preamble of the NAFTA renegotiation talks. U.S. President Donald Trump made good on his campaign promise to take the US out of the Trans Pacific Pact (TPP) and put NAFTA on notice back in his inauguration.
Weak economic fundamentals after an impressive first quarter had the loonie under pressure and alongside increasing political risk around the globe the currency was one of the worst performers this year. The more than 4 percent rise in oil prices today will help the CAD regain some of the ground lost, but is still too early to know if this price move represents a new phase for the Canadian dollar or just a temporary move.
The USD/CAD lost 0.598 percent in the last 24 hours. The currency is trading at 1.3656 after the impressive recovery of oil prices after the US oil inventories showed a bigger drawdown than expected. Commodity currencies were boosted by the fall in US crude inventories.
The Group of Seven (G7) Finance summit meets in Italy later this week. Trade is not front and center in the agenda, despite the rise of protectionist measures around the world. Finance ministers and central bank governor will focus on inequality, international tax rules, cyber security and blocking the funding of terrorism. Canadian officials will be sure to approach their US counterparts about trade while it is also expected EU and UK counterparts discuss the impact of Brexit not only in their economies but its effect for the G7 at large.
The Canadian economic calendar is slim this week. Already housing starts and building permits have disappointed and up next is the New Housing Price Index (NHPI) to be released on Thursday, May 11 at 8:30. Prices are expected to have growth by 0.20 percent. New regulations in the hottest markets appear to have cooled prices as anxiety around the country’s largest non-bank lender has subsided. Home Trust Capital has indicated that the withdrawal rate it had experienced is slowing down after the initial run on deposits in late April.
Oil prices surged by 3.754 percent on Wednesday. The price of West Texas is trading at $47.46 after the release of the US crude oil inventories showed a sharp drawdown of 5.2 million barrels last week. This is the largest drawdown in 2017 and managed to move the needle on prices. The OPEC has tried to reassure the market that an extension to their production cut agreement is coming but with doubts around the overall effect prices kept dropping. Lower inventories managed to break the stalemate. Again supply disruptions, this time caused by the weather in the Gulf of Mexico, are driving prices higher despite the sluggish growth in demand.
The inventory data also hints at a slowdown in US production. The growth in shale drilling had offset the OPEC and major producer pact effect on prices. The OPEC and other major producers will meet on May 25 to discuss the terms of an extension to their agreement. While Saudi Arabia has said that it will do whatever it takes to rebalance the oil market other producers might not share that level of commitment
Market events to watch this week:
Thursday, May 11
4:30am GBP Manufacturing Production m/m
7:00am GBP BOE Inflation Report
7:00am GBP MPC Official Bank Rate Votes
7:00am GBP Monetary Policy Summary
7:00am GBP Official Bank Rate
8:30am USD PPI m/m
8:30am USD Unemployment Claims
Friday, May 12
All day G7 Meetings
8:30am USD CPI m/m
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m
10:00am USD Prelim UoM Consumer Sentiment
Saturday, May 13
All day G7 Meetings
