The Canadian dollar depreciated on Wednesday after the U.S. Federal Reserve raised the benchmark US interest rate by 25 basis points as expected. The Fed also outlined the plans to gradually reduce its massive balance sheet later this year. The American central bank Chair was not concerned with inflation remaining weak and attributed current levels to temporary effects such as cellphone bills and drug prices. Earlier today the Consumer Price Index (CPI) and the core CPI came in lower than expected. CPI showed a contraction of 0.1 percent and the core CPI which is the Fed’s favourite measure of inflation grew less than expected at 0.1 percent. US retail sales also disappointed with a 0.3 percent contraction on both the headline and core numbers.
The loonie got a boost earlier this week when two officials from the Bank of Canada (BoC) discussed the possibility of reducing stimulus after the economy is displaying consistent growth. The Canadian dollar rallied after those comments and only the mighty Fed rate hike is keeping the CAD down.
For a second week in a row the oil inventories sank crude prices. This time it was not a buildup of crude stocks, but a large build of weekly gasoline inventories. The price of WTI fell more than 3 percent but did not drag the loonie down as the currency was still trading on the back of the comments from Bank of Canada officials.
The sugar deal between the US and Mexico appears to have been finalized. It marks the end of a years long dispute is intended to avoid tariffs on Mexican exports of the sweetener to the US. Mexico had already threatened to walk out of the NAFTA negotiations if tariffs are part of the conversation. The sugar agreement has rubbed producers on both sides the wrong way as some compromises were made in all sides. The NAFTA renegotiation is scheduled for the Fall after the US has already started the process to have those talks by late August.
The USD/CAD gained 0.364 in the hour after the Fed released its policy statement. The currency pair is trading at 1.3250 very close to the daily high after the end of the press conference by Fed Chair Janet Yellen. The loonie was up against the USD in the morning as US data disappointed but due to the timing would have little effect on the upcoming decision of the US central bank. The anticipated US rate hike came into being and will pressure the Bank of Canada (BoC) to keep up if it doesn’t want the rate gap to widen more if the Fed follows with another rate hike in September or December.
Another big concern for the Canadian central bank is the state of household debt. It dipped slightly in the first quarter but remains near record highs and could prove to be a big problem if the central bank takes too long to hike rates or if the move is too sudden. The ratio of debt to disposable income is a staging 166.9 percent. The central bank seems to be preparing the market even if the move could come near the end of the year or in early 2018.
Oil lost 3.614 percent on Wednesday. The price of West Texas Intermediate is trading at $44.70 after the release of the weekly crude inventories in the US by the Energy Information Administration (EIA) showed a lower than expected drawdown of 1.7 million barrels and a surprise buildup in gasoline stocks of 2.1 million barrels when a draw of 1 million was expected once again put downward pressure on crude. Low energy prices will keep global inflation under control and could foil the plans of the US Fed of another rate hike if US inflation does not pick up before the end of the year.
Market events to watch this week:
2:00 pm USD FOMC Statement
2:00 pm USD Federal Funds Rate
2:30 pm USD FOMC Press Conference
6:45 pm NZD GDP q/q
9:30 pm AUD Employment Change
Thursday, June 15
3:30 am CHF Libor Rate
3:30 am CHF SNB Monetary Policy Assessment
3:30 am CHF SNB Press Conference
4:30 am GBP Retail Sales m/m
7:00 am GBP MPC Official Bank Rate Votes
GBP Monetary Policy Summary
GBP Official Bank Rate
8:30 am USD Unemployment Claims
Tentative JPY Monetary Policy Statement
Friday, June 16
Tentative JPY BOJ Policy Rate
2:30 am JPY BOJ Press Conference
8:30 am CAD Core Retail Sales m/m
8:30 am USD Building Permits
