USD/CAD – ‘Bad is Good’ Has Oil and Loonie on the Rise

Despite the absence of any significant domestic data, the CAD is much stronger mid-day Thursday. A rise in crude oil prices and the U.S dollars broader intraday poor performance is giving the loonie an impressive bid to print new weekly dollar outright lows (CAD$1.2135).

In the U.S, the number of Americans seeking first-time unemployment benefits rose slightly last week (+1k to seasonally adjusted +295k vs. +290k expected), but remained consistent with an economy steadily adding jobs. Other data showed sales of newly built homes falling sharply last month, declining -11.4% to a seasonally adjusted annual rate of +481k units and putting an end to three months of solid gains. Today’s print was the sharpest decline in nearly two-years.

The Fed meets next week and must judge the U.S economy’s recent mixed signals alongside an economic slowdown in China and other parts of the globe. With the market now pushing the Fed’s first rate hike further out the curve (58% expect a September hike, down from +73% last week) is not helping any long-term USD bull’s positions.

For the commodity and interest rate sensitive CAD, rallying crude prices (Brent crude trading above $64 a barrel for the first time this year and West Texas Intermediary up +3% to $58) is giving most loonie bulls confidence to push on higher. In the short term, crude is expected to garner further support from the potential for supply disruptions in the Middle East and from weak data from China raising markets expectations for economic stimulus.

In China, the flash manufacturing PMI remained in contraction for the fourth consecutive month, recording a new one-year low print of 49.2. Digging deeper, the data reveled that new orders, along with input and output prices, decreased at a faster rate. This would suggest weakening domestic demand and disinflationary pressures and supports the potential of further stimulus measures from the PBoC sooner rather than later.

The loonie bull needs CAD$1.2135-40 to be broken with momentum to take on the ‘big’ dollar’s next psychological support level at $1.2100 just ahead of last week’s intraday low of $1.2089 (April 17).

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