USD/CAD Loonie Touches 11 Year Lows Driven by Oil Drop

Fed Anxiety and the Drop in Energy Prices Push USD/CAD Above 1.3770

The week when the U.S. Federal Reserve is expected to raise interest rates started with high volatility as oil prices have moved 5 percent from daily high to low. Prices in West Texas and Brent dropped to $34.40 and $36.40 respectively. The fall in energy prices applied downward pressure to the CAD who depreciated versus the USD.

The overproduction in crude as the OPEC and non OPEC members engage in a price war has been a boon for consumers as the price of gasoline is lower, but it has jeopardize the fate of nations that depend on energy exports to balance their budget. The USD/CAD pair touched a high of 1.3780 in the last 24 hours as the price of energy plummeted. Seeking a bargain hedge funds and other commodity buyers jumped back in to leave crude flat, which also boosted the CAD to appreciate and trade at 1.3736 at time of writing.

Canadian Finance Minister Warns of Weaker Currency

Canadian Finance Minister Bill Morneau spoke in Toronto at noon today to an audience of business people. The main take away from his speech is the forecast of future weakness of the loonie given the reliance on commodity exports, and the expected softness of raw material prices next year. There was optimism regarding trade with the United States, but China and Europe are question marks that could have a negative impact on the Canadian economy.

Canadian household debt numbers were released at 8:30 am rising to a new high as borrowing continues to grow. The Bank of Canada (BoC) and the Canadian government have issued warnings given the biggest increase has been on the real estate debt as low interest rates have made borrowing cheaper, but at the same time fuelled a continued house price increase. The Finance Minister announced a change in the down payment needed for properties above $500,000 from 5 percent to 10. The new down payment rules take effect next year and will only apply to the amount above $500,000. Household debt to personal income ratios are now 163.7 percent in Canada, up from 162.7 percent in July to September.

There is a possibility the government will follow up with regulatory changes to try to cool down the housing market but will wait to see the results in the downpayment changes. As winter approaches prices will seasonally slow down which can be considered a win by the government, but with the Fed expected to hike rates on Wednesday although the rate of interest raises is not foreseen to be strong given the precarious state of the U.S. economic recovery can still keep Canadian rates low with the risk of the housing market overheating as prices are still relatively cheap to foreign buyers with credit conditions being favourable.
CAD events to watch this week:

Monday, December 14
7:30 pm AUD Monetary Policy Meeting Minutes
Tuesday, December 15
5:00 am EUR German ZEW Economic Sentiment
8:30 am CAD Manufacturing Sales m/m
8:30 am USD CPI m/m
8:30 am USD Core CPI m/m
11:45 am CAD BOC Gov Poloz Speaks
Wednesday, December 16
2:00 pm USD FOMC Economic Projections
2:00 pm USD FOMC Statement
2:00 pm USD Federal Funds Rate
2:30 pm USD FOMC Press Conference
Thursday, December 17
8:30 am USD Philly Fed Manufacturing Index
8:30 am USD Unemployment Claims

Friday, December 18
8:30 am CAD Core CPI m/m

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza