USD/CAD Loonie Weaker After Oil Plummets Below $31

The USD advanced 0.242 versus the CAD in the past 24 hours. The fall in the price of oil, which tumbled 4.323 dragged the loonie lower. The Canadian economy has faced tougher challenges as the price of oil has been on a freefall after the slowdown in emerging markets has reduced the global energy demand at the same time that oil producers continue to pump at record levels.

The USD/CAD had a volatile Monday trading session with 1.282 percent gap between the high (1.4246) and lows (1.4065). The fate of the loonie is deeply tied to the price of oil. The Iran/Saudi Arabia diplomatic conflict as well as the high levels of supply available have kept the price low with very few arguments for a recovery. If anything forecasts of $20 per barrel are beginning to look more likely as now Morgan Stanley has joined the chorus of analysts expecting that price level.

The USD has risen as uncertainty from the market events triggered in China that pushed investors to look for safe havens.

The Bank of Canada released its Business Outlook survey this morning. The softness from the resource sector is spreading as commented by Governor Stephen Poloz. Business sentiment remains pessimistic and could be worse as the survey was before the latest rout in oil prices.

Merrill Lynch expected the BOC to make waves next week with a rate cut. The Canadian central bank shocked the markets last year with 2 proactive rate cuts after it accurately forecasted the fall of oil prices and its effect on the economy. This time around the central bank is facing a different scenario as the main questions now are: What is the Fed going to do and how long with energy producers maintain pumping levels? In both cases there is little the BOC can do even with a proactive stand.

There will be little in the way of indicators to guide the decision of the central bank as only the Housing starts and the selling price of new homes will be on the agenda this week. The Bank of Canada will announce its rate decision on Wednesday, January 20. The problem with being ahead of the Fed’s Federal Open Market Committee (FOMC) is that it means going in blind to the potential market disrupting decisions of the biggest central bank in the world. There are also no expected changes to the American benchmark rate despite the hawkish rhetoric from some Fed members. Interest rate divergence has given the edge to the USD for the last two years, with very little to show for it as the Bank of Canada has eased more than the Fed has tightened, but with the price of oil the BOC is running out of room to cut.

This week has few indicators overall with the highlight being:

Wednesday, January 13
10:30am USD Crude Oil Inventories
Thursday, January 14
7:00am Bank of England Rate Decision and Minutes
Friday, Jan 15
8:30am USD Core Retail Sales

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza