The Canadian Dollar rose against the US dollar on Tuesday after markets in the two countries came back from holidays. The loonie got a boost from higher oil prices after the Organization of the Petroleum Exporting Countries (OPEC) continues to signal a willingness to extend its production cut agreement with other major producers and plans to cut Saudi exports in November.
The Canadian dollar has appreciated versus the US dollar by 7.42 percent so far in 2017. The CAD is trading near the 80 cent price level but was close to the 70 cent level earlier in the year. The loonie strength can be explained by the following factors: a stable oil price, strong economic growth and an ineffectual Trump administration.
West Texas oil prices have been trading in a range of $43 to $53 after the Organization of the Petroleum Exporting Countries (OPEC) and other major producers have extended the production cut agreement. The supply restrictions have been offset by higher production levels in Brazil, Canada and the United States. Higher global demand for energy remains elusive and until then there is will be the push and pull between OPEC and US producers.
The Canadian economy leads economic growth in the Group of Seven. The International Monetary Fund (IMF) just updated gross domestic product (GDP) forecast to record a 3 percent gain in 2017. The Bank of Canada (BoC) hiked interest rates twice in 2017 to deal with the unexpected improvement in the economy after it said monetary policy stimulus was no longer needed. A third rate hike remains a possibility but is less likely as the momentum of the economy is showing signs of slowing down in the third quarter. The highest point of the year for the Canadian currency was after a surprise rate hike announcement in September when it traded at 82 cents. The ball now is on the hands of the U.S. Federal Reserve with a heavily anticipated December US interest rate hike that would again wide the gap with Canadian rates.
The greenback started 2017 on a tear with Donald Trump ready to unleash tax reform and infrastructure spending to achieve higher growth. Things have not worked out that way with immigration and healthcare reforms pushed ahead of the more market friendly initiatives. The focus on divisive policies has cost the current US administration substantial political capital as just now it gears up to attempt to pass the much awaited tax reforms. The North American Free Trade Agreement (NAFTA) renegotiation will also ramp up in the final months of the year as both Mexico and the United States wish to avoid it spilling over to 2018 as they both have elections in that year. The US remains a difficult partner to negotiate specially with the commander in chief openly dismissing the treaty. Talks so far have been less than productive, but there are some positive signs although by now it is almost a given that the process will not be speedy as the position of the US remains far from that of its partners.
The beginning of the year painted a picture where the loonie would be touching 60 cents, but steady oil prices, sound growth in Canada and an uncertain political climate in the US have pushed the currency closer to 90 cents. It will be difficult for the Canadian dollar to reach that levels without a third rate hike or a satisfactory renegotiation of NAFTA but the flip side is that only the Fed is actively boosting the US dollar, while the White House sometimes does more harm that good.
The USD/CAD lost 0.28 percent during the Tuesday session. The currency pair is trading at 1.2516 after opening higher in Asia at 1.2555. The return of North American trading resulted in a sell off of US dollar that benefited the loonie. The rise in oil prices and the uncertainty about US political reforms got the pair under 1.25 only to end the session at current levels.
Housing data released on Tuesday is still showing a slowdown in the sector. Housing starts fell to 217,118 but still beat expectations of a fall below 210,000. Building permits also cooled down with a 5.5 percent decrease in August.
The Bank of Canada (BoC) Deputy Governor Carolyn Wilkins spoke at an International Monetary Fund (IMF) panel in Washington. She said that household debt is one vulnerability of the Canadian economy that the bank is taking close attention. The BoC does not seem concerned with the financial system as the big banks are well capitalized, but a shock in prices could impact Canadian families. The central bank has hiked twice in 2017 as it deemed the economy did not need the stimulus it provided with the two rate cuts in 2015 on the eve of the drop in oil prices.
New house prices will be the next big economic release in Canada with a forecast of 0.3 percent gain as the real estate prices have fallen after regulation and higher rates. The Canadian economy got a vote of confidence today as the IMF improved its forecast for the end of the year, but there is no denying that the pace of growth has slowed down and is still too vulnerable to a major shock like the NAFTA deal being scrapped by the Trump administration.
Market events to watch this week:
Wednesday, October 11
2:00pm USD FOMC Meeting Minutes
Thursday, October 12
8:30am USD PPI m/m
8:30am USD Unemployment Claims
10:15am EUR ECB President Draghi Speaks
11:00am USD Crude Oil Inventories
Friday, October 13
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
