The Canadian dollar navigated a volatile trading day with little data out to Canada to support the currency. American economic indicators were in line with expectations with core durable good orders grew at 0.4 percent and orders including transportation were 3.4 percent higher, but the core data is more telling as it removes the volatile transportations items and is a better gauge of purchasing trends.
Yesterday’s announcement by the Bank of Canada (BoC) to keep interest rates unchanged at record low 0.50 percent and the higher than expected drawdown in U.S. crude inventories have boosted the loonie against the USD even as the release of the minutes from the April Federal Open Market Committee (FOMC) have put the June rate hike back on the table surprising the market after the Fed’s non committal statements earlier in 2016.
The lack of an impressive data release to further validate the market’s view of a higher probability of a rate hike has given opportunity to the CAD to advance as the price of oil has been driven by supply disruptions such as the ones in Alberta, Nigeria and France.
The USD/CAD has lost 0.7 percent in the last 24 hours. The pair is trading at 1.2993 after breaking the 1.30 price level after the loonie received a boost from oil prices that had Brent at $50 only to pare back some of those gains as the trading session progressed. Oil linked currencies had a chance to advance versus the USD as economic data out of the U.S. was inline with expectations and there was no insights pointing to a Fed funds interest rate in the June Federal Open Market Committee (FOMC).
West Texas has advanced 0.96 percent in the last 24 hours. The price of crude touched $50 as supply disruptions have taken the spotlight away from oversupply concerns. Nigeria, Libya, Canada and France are suffering different type of disruptions to their production, but for all it is deemed a temporary setback. Alberta is waiting to restart production after the wild fires allow the oil sands projects to function. The biggest risk about rising energy prices is that it could trigger shale operators in North America to come back online, putting the supply glut at the forefront once again with Organization of the Petroleum Exporting Countries (OPEC) members except Venezuela pumping at record levels in a market share battle amongst themselves and other producers such as Russia.
The rise of crude is a mixed blessing for the Canadian economy. On one side the rapid rise in 2016 has not offset the tumble from 2015, leaving Canadian energy projects still waiting higher prices to justify restarting production. The energy boost to the CAD also hurts its competitiveness even when a lower currency has not immediately helped reduce the trade balance. There have been improvements in the service sector, but the hole left by manufacturing has not been filled fast enough for the central bank’s plan to diversify away from natural resources.
The end of the week will bring little data for traders to digest. The second U.S. GDP estimate will be released at 8:30 am but being the second release means it won’t be as meaningful as it is mostly an update to the 0.5 percent GDP published on April 28 that disappointed. The forecast for the second estimate calls for a 0.8 percent gain in the first quarter. The Fed has maintained this is a transitory slowdown after the macro headwinds in January. The U.S. economy expanded 1.4 percent in the fourth quarter of 2015 so the sharp fall is what made the Fed change its tune from December after hiking the interest rate. Economic releases have improved in the U.S. and the comments from the Fed in the minutes from April’s FOMC. Fed Chair Janet Yellen will deliver a speech on Radcliffe Day at Harvard later in the day. Given the less official setting it would be a surprise if Chair Yellen offers any surprising insight into the Fed rate hike path while accepting the Radcliffe Medal for her transformative impact on society, but given the mostly pro-rate hike talk of Fed members in the past week it could continue the trend to favour a move in June.
CAD events to watch this week:
Friday, May 27
8:30am USD Prelim GDP q/q
1:15pm USD Fed Chair Yellen Speaks
*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar
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