The Canadian dollar appreciated on the Fourth of July trading session on the back of comments from Bank of Canada (BoC) Governor Stephen Poloz to a German newspaper where he once again reiterated that he is concentrating on where the economy will be 18 to 24 months from now. The BoC came out of left field in June with a couple of statements from senior policy makers that surprised the market which had not priced in a rate hike this year for Canadian interest rates. The market is now considering a 50 percent probability of a rate hike during the July 12.
Governor Poloz told the Handelsblatt that Canadian inflation should be well into an uptrend by the first half of 2018. The timeline sheds some light on the change in tone from the Central bank that is now dropping heavy hints of upcoming monetary policy changes. Previously Mr. Poloz did not broach the subject of inflation as energy prices have dampened the Canadian CPI to 1.3 percent on an annual basis and far from the central bank’s target of 2 percent.
Inflationary growth is a major concern, not only for the BoC but for all major central banks. The economies of Europe, Japan, the United States and England appear to be on the mend by most indicators, the missing link inflation. The U.S. Federal Reserve has said that it won’t let inflation get in a the way of tighter monetary policy as it gets ready to hike once again and reduce the massive balance sheet it accumulated during the quantitive easing program. The European Central Bank (ECB) and Bank of England (BoE) have started the hawkish rhetoric, but will have to first sort out the tapering of their stimulus programs. The Bank of Japan (BOJ) is holding the rear as some political turmoil after the Tokyo elections could signal a fracture of old dynamics and reduce the power of Prime Minister Shinzo Abe. The Japanese central bank has mentioned the possibility of ending its QE program, but as it stands it won’t happen in the short term.
The USD/CAD lost 0.493 in the last 24 hours. The currency pair is trading at 1.2936 during the Fourth of July holiday in the United States has reduced liquidity. The CAD kept rising despite a holiday on Monday due to Canada Day, with the extra long weekend limiting the action on the currency pair. Governor Poloz is making sure the market receives the July 12 signal loud and clear. Prior to June 11 the market was not considering a change in monetary policy this year. The BoC was proactive in 2015 with two rate cuts to ease the impact of the impending drop in oil prices. Now the central bank has deemed those cuts served their purpose and with energy enjoying some stability and the U.S. Federal Reserve already up to a 100–125 basis points range with at least another to come, the BoC quickly put on the table a rate hike that could come as early as the next meeting on July 12.
The loonie has risen on solid energy prices but also a lack of traction from the USD. The Trump administration is still struggling to pass the divisive healthcare reform that is now clogging the path of more pro-growth policies that were promised. The Canadian dollar
Oil rose 0.611 percent on Tuesday. The price of West Texas Intermediate is trading at $46.93 after a 8 session rally continues into a 9th with one of the best performances of crude prices since 2010. US crude inventories are usually published on Wednesday at 10:30 am EDT, but this week the Fourth of July holiday will push back the release date to Thursday. Forecasts are pointing to another drop in crude inventories.
The Organization of the Petroleum Exporting Countries (OPEC) production cut agreement has stabilized prices, but rising US production has cancelled out more positive effects. Nigeria and Libya although OPEC members are exempt from the deal as disruptions had hit their output, but are now back at normal levels putting some pressure on energy prices.
Oil markets will be awaiting the numbers form the Energy Information Administration (EIA) on Thursday as the supply battle between the OPEC and US shale producers continues with low evidence of a recovery of global demand.
Market events to watch this week:
Wednesday, July 5
4:30 am GBP Services PMI
2:00 pm USD FOMC Meeting Minutes
9:30 pm AUD Trade Balance
Thursday, July 6
8:15 am USD ADP Non-Farm Employment Change
8:30 am CAD Trade Balance
8:30 am USD Unemployment Claims
10:00 am USD ISM Non-Manufacturing PMI
11:30 am USD Crude Oil Inventories
Friday, July 7
4:30 am GBP Manufacturing Production m/m
8:30 am CAD Employment Change
8:30 am CAD Unemployment Rate
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change
