The Canadian dollar was appreciating against the US dollar in Tuesday morning trading, only for the tables to be turned after the release of the Producer Price Index (PPI) in the United States. The price that producers pay rose higher than expected in October. The rise of inflation expectations did little for the USD against other currencies, specially the EUR with Europe posting strong GDP data earlier in the day. The loonie had no economic data to counter the rise in US producer prices and gave back the gains from earlier in the day. Near the close of trading the USD/CAD is back to where it all started and looking ahead at the release of the US retail sales and consumer price index (CPI) data on Wednesday.
The US Bureau of Labor Statistics will publish the change in consumer prices on Wednesday, November 15 at 8:30 am EST. At the same time the US Census Bureau will release the monthly retail sales data. Core inflation is forecasted to come in at 0.2 percent on a monthly basis adding up to a 1.7 percent year to year comparison. Core retail sales are expected to have gained 0.2 percent in October.
NAFTA negotiations will resume in Mexico City this week in what could prove a decisive meeting between Canada, Mexico and the United States. The US tax overhaul has stolen the spotlight and with two proposals ready to go the Trump Administration needs the support of the Republican party. Trade friendly republicans could negotiate their support for tax reforms if some progress is made on the NAFTA renegotiation. Canada launched a NAFTA challenge on the softwood lumber duties imposed by the US.
The USD/CAD was flat on Tuesday. The currency pair is trading at 1.2732 after the release of a positive PPI data beat expectations and validates the anticipated December rate hike by the U.S. Federal Reserve. The gap between the US and Canadian benchmark interest rates will grow as the Bank of Canada (BoC) has a lower probability of lifting interest rates than the US central bank.
The BoC has already hiked twice in 2017 after a hawkish turn in summer, only to pump the brakes before the end of year. The Canadian interest rate is 1.00 percent, back to its 2015 levels where the BoC cut twice to avoid a deeper impact of the fall in crude prices. The Fed has hike twice and is looking to finish the year with a 25 basis points raise in December.
NAFTA negotiations will weigh in the currency market as Canada export 75 percent of its production to the United States and the threat by President Trump to rip it in half could end up being more than hard negotiating tactics.
The price of crude fell 2 percent on Tuesday. West Texas Intermediate is trading at $55.54 after the International Energy Agency lowered its crude demand forecast and earlier weaker than expected economic data out of China gave credibility to the demand downgrade. Oil had risen after the arrest two weeks ago in Saudi Arabia and optimistic forecasts by the Organization of the Petroleum Exporting Countries (OPEC) as well as a pledge to extend its production cut agreement with other major producers.
The IEA cut its growth forecast by 100,000 daily barrels due to warmer weather and in contrast still sees some producers taking advantage of current prices to increase production levels. Brazil, Canada and the United States are big producers not part of the OPEC deal and are expected to ramp up their supply levels. Investors sold off crude positions on the back of the news and ahead of the weekly release of US crude inventories. After the surprise buildup last week, stocks are expected to show a 2.1 million barrel drawdown on Wednesday, at 10:30 am EST when the Energy Information Administration (EIA) releases the report.
Market events to watch this week:
Wednesday, November 15
4:30am GBP Average Earnings Index 3m/y
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
8:30am 10:30am USD Crude Oil Inventories
7:30pm AUD Employment Change
Thursday, November 16
4:30am GBP Retail Sales m/m
8:30am USD Unemployment Claims
Friday, November 17
8:30am CAD CPI m/m
8:30am USD Building Permits
