The Canadian dollar was dragged lower as volatility in the energy markets continues. Organization of the Petroleum Exporting Countries (OPEC) member Iran is willing to freeze production output of crude, but not at January levels as Saudi Arabia and Russia have been discussing. Iranian production was halved as the international sanctions that were lifted this year took its toll. The plan from Tehran is to boost production back to pre-sanction levels; around 4 million barrels a day from current 2.8 million barrels.
The loonie as the Canadian currency is called is heavily correlated to the price of energy as some traders use it as proxy for oil transactions. Economic fundamentals have been mixed, but the heavy reliance on commodities hit the Canadian economy hard as prices tumbled after a reduction in global demand. A weak currency has helped give some hope to non-resource exports, but the gap is still too big for services and manufacturing to make up.
The USD has struggled to maintain its credentials as a strong currency as a second rate hike looks unlikely in March and fulfilling the Fed’s forecast of 4 rate hikes in 2016 is almost a mirage. The interest rate divergence that fuelled the strong dollar rhetoric in 2015 has mostly evaporated and now the buck is at a cross roads even with the European Central Bank (ECB) and the Bank of Japan (BOJ) doing all they can to depreciated their home currencies.
The USD has advanced 0.38 percent in the last 24 hours versus the CAD. The pair continues to trade below 1.33, but it did break through that level as the price of oil plummeted. USD/CAD is trading at 1.3266 with the USD gaining a foothold ahead of the U.S. central bank Federal Open Market Committee (FOMC) meeting kicking off tomorrow and to be closed with the statement release and a Chair Yellen press conference.
Oil Output Freeze Faces Resistance Within OPEC
The price of West Texas backtracked 2.57 percent, Brent fared slightly better dropping 1.76 percent as word started spreading about Iran not joining the freeze output agreement with other Organization of the Petroleum Exporting Countries (OPEC) members and Russia. Iran’s negative was hardly a surprise as the group plan to freeze output levels based on January production. Those production levels for Iran are lower as the international sanctions almost halved Iranian production. The price of oil has ignored for the most part growing stockpiles of crude thanks to the efforts of the Output Freeze. That price stability has withstood a clear lack of coordination as the dates of summits when the all important freeze will be discussed keep changing as all sides remain uncommitted.
Drops in gasoline inventories have been taken as good signs of growing demand, but as Iran is putting the oil glut front and center the price of the black stuff has stopped its advance. The summit in March seems to be off the table, with a new date being floated around for April.
CAD to Trade with Little Data Ahead of FOMC
The Canadian forex calendar is a light one this week and doesn’t really kick in until Wednesday morning. Manufacturing sales are forecasted lower than last month at 0.4 percent. The strong loonie after the credit crisis in 2008, supported by strong oil prices, made manufacturing in Canada too expensive and most of the manufacturing base moved to cheaper destinations. Now that the currency is not as strong, it has proven a challenge to rebuild after the erosion even with a a relative competitive advantage on wages. Inflation and sales data on Friday would complete a snapshot of the Canadian economy after the disappointing jobs report on Friday. The Bank of Canada (BoC) has held rates twice in 2016 awaiting the effects of the Federal budget that will be announced on March 22.
CAD events to watch this week:
Wednesday, March 16
8:30am CAD Manufacturing Sales m/m
8:30am CAD Foreign Securities Purchases
Thursday, March 17
8:30am CAD Wholesale Sales m/m
Friday, March 18
8:30am CAD Core CPI m/m
8:30am CAD Core Retail Sales m/m
8:30am CAD CPI m/m
8:30am CAD Retail Sales m/m
*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar