The loonie was not dragged down by a tumble in oil prices and managed to eke out gains after the Canadian and U.S. bond yield spreads narrowed due to the softness of the big dollar. The USD was being sold off in exchange for investors looking for safety and headed into EUR, CHF and JPY. The CAD was able to advanced on the USD despite the heavy correlation exhibited earlier this year between the price of crude and the loonie.
Tomorrow’s words by U.S. Federal Reserve Chair Janet Yellen could either turn around the fate of the USD or put further downward pressure if she gives any indication of the March FOMC being off the table to announce a rate hike. The Fed had forecasted 4 rate hikes in 2016, but that was before market conditions deteriorated in January. The price of energy quickly fell and along with a strong market sell off in Asia combined to put a double whammy on the Canadian dollar. In the last week the CAD had shown some signs of not following every move of energy, as Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC members were floating around the idea of a production agreement. That remains fiction at this point given the mercurial temperament of the nations involved.
The USD depreciated 0.356 percent versus the CAD in the last 24 hours. The U.S. dollar has been on the back foot versus majors and only making a few gains against non-Asian emerging markets. Rumours of an internal crisis at Deutsche Bank has spooked some investors and triggered a sell off of riskier assets in the search for safety.
West Texas lost 5.84 percent and Brent 6.8 percent as the International Energy Agency made comments about the continuing supply of crude. The IEA thinks the current price is about right for the amount of supply in the market, with $10 being too low, but warns that low prices will persist until production is curbed, or demand is higher. Both of those are easier said than done it seems, after the OPEC and non-OPEC deal appears to have vanished, although it begs the question was it really ever there in the first place?
The CAD has managed to split from the price of oil after being joined at the hip with a high correlation earlier this year. Resources are the lifeblood of Canada, but not 100 of its exposure, so diverging trends are expected going forward.
Janet Yellen’s words could make or break the USD at this point. The CME’s FedWatch tool shows less than 2 percent chance of a rate hike in March, and it gets only slightly better in the next couple of FOMCs. Janet Yellen has the tough job of selling an upcoming rate hike, but without letting the timeline out of the bag, if there is one.
The loonie will be flying without help from economic indicators to guide the way. Next one is up on Thursday, February 11 with the new house price index, which could bring some support to the CAD. The higher levels of debt fuelled by low rates keep pumping the real estate market in Canada, particularly in the major urban areas of Montreal, Toronto and Vancouver. The Bank of Canada (BoC) has issued multiple warnings to Canadians to watch their burden of debt, and yesterday Deputy Governor Lane urged regulators to step up. Mrs. Yellen goes to Washington on Wednesday and the market will be watching.
CAD events to watch this week:
Thursday, February 11
8:30am CAD NHPI m/m
*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar