The Canadian dollar depreciated on Thursday against the US dollar after US economic releases were positive and gross domestic product (GDP) forecasts were upgraded for the second quarter. The Trump administration has also put forth a plan to get the much awaited tax reform policy plan in motion. Trump had promised tax reforms and infrastructure spending out of the gate of his presidency, but had so far put higher priority in more divisive issues. The pro-growth policy and the decision to drop the border tax shows a willingness from Republicans to abandon the controversial measures to assure a tax overhaul.
The US Bureau of Economic Analysis will publish the first estimate of second quarter gross domestic product (GDP) on Friday, July 28 at 8:30 am EDT. The market is forecasting a 2.5 percent gain in the advanced 2Q GDP figures. Growth is anticipated to have accelerated after a disappointing first quarter pace of 1.4 percent. A print below the forecast would be seen as a negative for the USD with the Atlanta Fed upgrading its forecast on Thursday from 2.5 percent to 2.8 percent.
A strong rebound in GDP growth would put the dovish FOMC statement into perspective. The concerns about low inflation were blown out of proportion in the Fed communication but could go either way if the growth of the US economy disappoints on Friday. The loonie has appreciated this year thanks to strong Canadian fundamentals and the quick hawkish turn form the Bank of Canada (BoC) that translated into a rate hike in July.
The USD/CAD gained 0.881 percent on Thursday. The currency pair is trading at 1.2556 after the USD rebounded following an improved GDP forecast and the Trump administration getting back on track to pass the promised tax reform. The loonie fell with no support from economic releases and despite the rise of oil prices.
The release of the first estimate of second quarter US GDP tomorrow at 8:30 am EDT will be the the highlight of the trading session. At the same time Canadian monthly data will be released. The US is anticipated to have grown close to 2.5 percent while Canadian monthly GDP gains are expected at 0.2 percent matching last month’s release.
Economic indicators have been mixed for the US economy. The U.S. Federal Reserve hiked the benchmark interest rate in June, but is awaiting signs of accelerated growth before committing to a third rate hike this year. Inflation in the United States remain weak but if employment and growth keep their pace of growth the central bank will hike as planned. A slowdown in the progress of the US economy would trigger a more dovish Fed which could put the dollar under downward pressure.
Oil prices were behind the decision from the Bank of Canada (BoC) to cut interest rates back in 2015 so with the stability provided by the Organization of the Petroleum Exporting Countries (OPEC) and other producers limiting output it makes sense to bring the rate back to previous levels. There are rumours that the decision did not sit well with the Canadian government as it could cause pain to high debt households. Real estate prices in Vancouver and Toronto have retreated for the moment, but it will take more than 25 basis points to trigger a correction. The central bank could follow through with another hike before the end of the year to bring rates back to 2015 levels and also keep the gap between American and Canadian rates to widen.
The price of energy has gained 1.138 percent on Thursday. West Texas Intermediate is trading at $48.83 on a volatile session where crude moved more than two percent intraday. Bigger than expected drawdowns in US inventories and what appears to be a change in strategy from shale drillers as US production is anticipated to slow down has given this round to the producers who agreed to cut production.
The Organization of the Petroleum Exporting Countries (OPEC) and other major producers will continue to limit production until March of 2018 with Saudi Arabia taking a leadership role but asking for more compliance to the agreed levels of production. Disruptions in Libya and Nigeria make them exempt of the deal, but as those issues are sorted production has growth threatening the efforts of the group.
Crude has gained 4.7 percent in the last five days as US production has slowed down as evidenced by shrinking inventories. The OPEC agreement is a long way in reducing the supply glut but so far its efforts have resulted in higher oil prices. Internal dissent and the difficulties of proper production compliance will be a challenge going forward as well as a ramp up from Brazil, Canada and US operations once oil reaches higher price levels.
Market events to watch this week:
Friday, July 28
8:30 am CAD GDP m/m
8:30 am USD Advance GDP q/q
*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar