Fed’s Yellen said one time factors are suppressing US inflation
The Canadian dollar rose on Thursday continuing the trend that started on Wednesday by the Bank of Canada (BoC) raising interest rates by 25 basis points. With few economic indicator released on the calendar the market was focused on the testimony of Fed Chair Janet Yellen to the Senate Banking Committee. The head of the US central bank did not add anything new to the line the Fed has following since March. Rate hikes when appropriate and a soon to start reduction of the balance sheet. Inflation in the US remains low and by her estimate is due to temporary factors. If those factors are not one-time as the Fed economists believe it could mean a less aggressive rate hike path. Inflation expectations are subdued in the US and tomorrow’s release of the Consumer Price Index (CPI) will validate those concerns if the core reading is near the forecasted 0.2 percent and adding the volatile food and energy the gains are a mere 0.1 percent.
The loonie rose on a combination of USD weakness due to political uncertainty, Yellen’s remarks on inflation and a surge in oil prices following better than expected demand out of China.
The International Monetary Fund (IMF) warned Canada about the housing bubble and NAFTA renegotiation risks even though the economy has shown to be on a recovery track. The IMF suggested the Bank of Canada (BoC) remain on an accommodative track, suggesting the decision to raise rates was premature and urged the central bank to remain cautious and vigilant.
The USD/CAD lost 0.027 on Thursday. The currency pair is trading at 1.2729 while caught in a tight range after the Bank of Canada (BoC) hiked the benchmark rate on Wednesday. The 25 basis point is the follow up to hawkish comments from senior policy makers at the central bank. The BoC cut rates twice in 2015 to proactively prepare the economy to endure the fall in oil prices. Now those cuts are supposed to have done their job and with oil prices stable Governor Stephen Poloz is now expected to raise rates once more before the end of the year with the October meeting being priced in at a 70 percent probability.
The price of oil rose 1.162 percent in the last 24 hours. The West Texas Intermediate is trading at $45.97 following a fourth session of gains. The large drawdown of US crude inventories boosted oil prices while at the same times there were signs of growing demand around the world. Crude stockpiles fell 7.6 million barrels, with the previous report also showing a 6.3 million barrel drop.
The Organization of the Petroleum Exporting Countries (OPEC) deal with other major producers to limit production has been the biggest factor keeping prices stable. There are concerns that compliance with the deal that was near 100 percent this year, has fallen to 78 percent as some producers like Saudi Arabia have seasonal rises this time of year.
Market events to watch this week:
Friday, July 14
8:30am USD CPI m/m
8:30am USD Core CPI m/m
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m
