The Canadian dollar is falling versus the US dollar on Tuesday following the fall in crude prices and hawkish Fedspeak. The loonie has slipped against the greenback as crude is touching 7 month lows after oversupply concerns as Organization of the Petroleum Exporting Countries (OPEC) members Libya and Nigeria are back to full output after sorting several disruptions.
Central banks appear to have retaken the steering wheel in June. The Bank of Canada (BoC) surprised markets with hawkish comments from its Deputy Governor Carolyn Wilkins that were later followed up by Governor Stephen Poloz putting a rate hike firmly on the table. The timing was not discussed but as other central banks are getting ready to engage in major monetary policy shifts this year the BoC has issued rhetoric to say it is sticking with the pack.
The CAD appreciated after the comments from Canadian policy makers even in a week that featured the second interest rate hike by the U.S. Federal Reserve in 2017 and a weaker outlook on oil prices. The mood this week has changed slightly as Fed speakers have for the most part supported the decision of the Federal Open Market Committee (FOMC) and keep forecasting sustained growth that would validate 1 or 2 more rate hikes with the possibility of a reduction of the US central bank’s massive balance sheet.
The fall in oil prices has also sapped the momentum of the Canadian currency as despite the best efforts of the government and the central bank the economy is still heavily dependant on natural resources.
The Fed is most likely to hike at its September or December FOMC meetings. Markets are now pricing in a move by the BoC in October, which conveniently falls in between. If the Fed refrains from raising its benchmark rate in September, the end of the year becomes a huge possibility. Stephen Poloz has shown he prefers to be proactive and might try to anticipate a move by the Fed and the European Central Bank (ECB) that is also expected to either being tapering its QE program or raise rates, or both before the end of the year.
The USD/CAD gained 0.346 percent in the last 24 hours. The currency pair is trading at 1.3266 after falling oil prices and hawkish rhetoric kept the USD higher against the Canadian currency. Central bank moves have shifted once again the pricing of the USD/CAD pair. The Fed is now expected to hike in September or December. The CME FedWatch tool is giving the September FOMC meeting a 14 percent probability, while December enjoys a 50 percent chance based on Fed funds future prices.
The biggest risk for the CAD and the economy before the end of the year is the renegotiation of NAFTA. Earlier today agriculture ministers from the three partner nations said that there are few differences over trade but the combative tone from the Trump administration ahead of the start of negotiations. The BoC is sure to get a feel for how the talks shape up when they start in late August. Mexican officials have said that the conversations should not go beyond December.
Oil fell 1.876 on Tuesday. The price of West Texas Intermediate is trading at $43.26 on fears of oversupply now that Libya and Nigeria have sorted their local disruptions to production. Both nations are exempt from the OPEC production cut agreement given their fragile infrastructure and political climate.
Oil got a boost late in the day when the American Petroleum Institute released its weekly inventories showing a 2.7 million barrel drawdown in crude stocks and a 300,000 barrels buildup in gasoline. The drawdown of crude stocks was higher than expected, while the gasoline inventories increased by less than expected. The move in oil prices will be confirmed once the Energy Information Administration (EIA) released the official weekly US crude inventories on Wednesday, at 10:30 am EDT.
Market events to watch this week:
Tuesday, June 20
2:30 am CHF SNB Chairman Jordan Speaks
4:45 am CHF SNB Chairman Jordan Speaks
Wednesday, June 21
10:30 am USD Crude Oil Inventories
4:00 pm NZD RBNZ Rate Statement
5:00 pm NZD Official Cash Rate
Thursday, June 22
8:30 am CAD Core Retail Sales m/m
8:30 am USD Unemployment Claims
Friday, June 23
8:30 am CAD CPI m/m
