Canadian markets were back online and the loonie did not fare well agains the big dollar as oil fell following the announcement of an oil deal between Russia and some members of the Organization of the Petroleum Exporting Countries (OPEC).
The Canadian dollar had managed to break some of the correlation to the price of energy, but the loonie and crude became once again joined at the hip. It appears that the higher the volatility and the presence of oil shocks dials the correlation up, while a return to other fundamentals lowers the direct relationship between the CAD and energy prices.
Canadian manufacturing sales impressed by beating expectations by posting a 1.2 percent gain in January. Canadian manufacturers have now two months of back to back growth boosted by car sales and wood products. The gains in some products offset the losses of oil and coal products. The positive Canadian data was overshadowed by a disappointing Empire State Manufacturing Index out of the U.S which contracted more than expected to –16.6. This is bad news for Canadian exporters as the majority of good will end up in the U.S. but a reduction of American business activity will limit the growth of business north of the border.
The USD/CAD advanced 0.346 percent in the last 24 hours as both the U.S. and Canadian markets came back from holidays. The pair touched highs of 1.3912 after the price of oil dropped following the underwhelming announcement by the Organization of the Petroleum Exporting Countries (OPEC) and Russia about a production agreement. The fact that the four nations agreed on freezing current levels did not make much of a dent given that current levels are record high production quotas and leave global supply far outstripping demand.
The USD got a shot in the arm with the market now expecting at least a couple of rate hikes in 2016 as opposed as none as the effects of the global slowdown were at first thought to force the U.S. Federal Reserve to stand pat. The testimony of Chair Yellen and other member comments added to the probability of a rate hike as early as June. Tomorrow the publication of the minutes from the Fed’s January Federal Open Market Committee (FOMC) will add some insights into what policy members discussed as they held rates unchanged.
Canadian Finance Minister Bill Morneau reminded lawmakers to expect a higher deficit given the current economic conditions at home and abroad. Liberals ran a campaign based on infrastructure spending that would put Canada on a deficit, but by 3 to 4 years time the country would return to a surplus. That promise is has now been amended given the market slowdown and the Liberals cannot guarantee a surplus. Fiscal stimulus and government spending will go ahead as planned with much anticipation of the Liberal budget to be released in March. The Bank of Canada held rates unchanged in January awaiting the budget from Ottawa, but another rate cut as well as negative rates remain on the table for the BOC as it monitors the health of the Canadian economy.
CAD events to watch this week:
Wednesday, February 17
8:30am USD PPI m/m
2:00pm USD FOMC Meeting Minutes
4:45pm NZD PPI Input q/q
7:30pm AUD Employment Change
Thursday, February 18
8:30am USD Philly Fed Manufacturing Index
8:30am USD Unemployment Claims
11:00am USD Crude Oil Inventories
Friday, February 19
8:30am CAD Core CPI m/m
8:30am CAD Core Retail Sales m/m
8:30am USD CPI m/m
8:30am USD Core CPI m/m
*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar