CAD unchanged ahead of Fed Rate Announcement
The Canadian dollar is trading in a tight range on Tuesday. The US dollar remains mixed against majors due to political uncertainty in Washington as the Russian probe saga continues. The U.S. Federal Reserve will release the Federal Open Market Committee (FOMC) rate statement on Wednesday, July 26 at 2:00 pm EDT. The market is pricing in a 96.9 percent that the benchmark Fed funds rate remains unchanged with only slightly better odds in the September meeting. The US target rate sits at 100-125 basis points after the 25 basis points rate hike in June.
US Shale Producers Slowing Down
Oil prices surged after US producer Anadarko Petroleum revealed quarterly losses were higher than expected and will impact its capital spending in 2017. US shale producers have been caught in a market share war with Organization of the Petroleum Exporting Countries (OPEC) that allowed crude prices to free fall. Now the OPEC has tried to stabilized prices by getting members and other major producers to agree to cut output, but US producers were not part of the agreement and have continued to ramp up operations. The news from Anadarko gives some insight into how current levels are not profitable enough, which could lead to a slowdown in expanding rig counts and allow the production cut deal to soak some of the excess inventory around the world.
OPEC to Ramp up Compliance with Cut Agreement
Yesterday Saudi Arabia upped their production cut promise with an additional 300,000 barrels a day. The agreement runs until March of 2018 although there are signs that some members are struggling to meet their allotted quotas. OPEC does not seem to offer any sympathy to those nations not exempt form the agreement and if anything there is an expectations of more strenuous compliance.
US Wants to Remove NAFTA Dispute Settlement Mechanism
Canadian Prime Minster Justin Trudeau commented today on the United States plan to remove Chapter 19 from the NAFTA trade agreement as one of the objectives of the negotiation. The chapter is a dispute settlement mechanism that forces the US to avoid anti-dumping and anti-subsidy cases against Mexico and Canada. This has been the biggest point of contention ahead of the NAFTA renegotiations form Mexican and Canadian officials. The current system requires a binational panel to hear the complaints and issue a decision.
The USD/CAD lost 0.051 percent in the last 24 hours. The currency pair is trading at 1.2509 as US dollar softness and the sudden rise of oil has put the loonie flat against the greenback. Economic data in Canada has so far validated the decision from the Bank of Canada (BoC) to raise interest rates in July. The CAD remains close to 1.25 or 80 cents awaiting the statement form the Fed on interest rates on Wednesday, July 26 at 2:00 pm EDT.
The CME FedWatch tool is showing a minute probability of a rate hike in July, and its not until December that the odds move higher than 50/50. The Fed has so far hiked twice in 2017 and one more rate hike is expected, but it will depend heavily on economic indicators showing signs of improvement. The Fed is more likely to start its balance sheet reduction soon, with the September meeting looking like an obvious candidate.
Oil surged 3.054 percent on Tuesday. The price of West Texas Intermediate is trading at $47.62 as US shale producers are cutting capital spending a day after Saudi Arabia renewed a push to cut production further. Current oil prices have not been that profitable for US shale producers, although ironically their increased production has kept crude in the current range. The actions of US drilling companies has offset the pact between Organization of the Petroleum Exporting Countries (OPEC) and other producers intended to limit output. During this week’s meeting in Russia the group renewed their pledge to stabilize prices and to be more vigilant about compliance with the agreement as a coordinated effort is paramount.
Two US companies said yesterday that rig counts were slowing down as producers were not sure which direction the price of crude would take. Crude inventories have gone down around the globe as the OPEC deal but still remain above average. API inventories on Tuesday afternoon and the Energy Information Administration (EIA) weekly crude stocks to be released on Wednesday at 10:30 am EDT will guide prices after the comments from OPEC and US producers have caused prices to rise early in the week.
Market events to watch this week:
Wednesday, July 26
4:30 am GBP Prelim GDP q/q
10:30 am USD Crude Oil Inventories
2:00 pm USD FOMC Statement
2:00 pm USD Federal Funds Rate
Thursday, July 27
8:30 am USD Core Durable Goods Orders m/m
8:30 am USD Unemployment Claims
Friday, July 28
8:30 am CAD GDP m/m
8:30 am USD Advance GDP q/q
