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USD/CAD Loonie Dragged Lower by Plummeting Oil Prices

BOC Rate Cut Expectation Rise After Oil Drop Takes Loonie to 13 Year Low

The USD/CAD has appreciated 2.71 percent this week. The Loonie is caught in a downward spiral that was triggered by the drop in oil prices. The price of a barrel of West Texas crude has broken through the $30 mark several times and it has traded below $29 briefly. The Bank of Canada (BoC) is an advocate for lower currency prices as it helps the exporting profile of the nation, but when that comes as a result of a drop in one of Canada’s major exports it poses a major threat to economic growth.

The USD/CAD advanced 1.17 percent today with the CAD hitting 13 year lows versus the USD. The currency pair traded at a 1.4547 high after touching a session low of 1.4344. The loonie appreciated after the release of the U.S. retail sales, but the drop in the price of oil made the currency trade above the 1.45 price level and keep rising as more uncertainty remains ahead of the Bank of Canada decision next week.

The BOC will take center state on Wednesday, January 20 when it announces its rate statement. At the end of 2015 the possibility of a rate cut from the central bank was almost zero. The Federal Reserve had just announced a much-awaited rate hike to the U.S. benchmark which gave some breathing room to the BOC regarding its next move. Now the rapid decline of oil (10.85 percent this week) might force the hand of BoC governor Stephen Poloz. Economists and analysts are divided on what to expect next week as so much has changed. Even if the moves are not totally shocking, as they were anticipated, the speed in which the market is reacting has many updating their forecasts of the Bank of Canada’s next move.

Bank of Canada Rate Cut Now at 50/50 in January

The market sentiment about the Bank of Canada has built expectations of a 50 percent chance of a rate cut next week. This is radically different form later expectations that had the central bank cutting the rate twice, like they did in 2015, but for 2016 it later in the year as more of the Federal Reserve’s path rate hikes was given clarity. The drop in oil has the Canadian government concerned as exports of non-energy products have not offset the losses due to the lower price of crude. Inflation expectations have risen, given that imports are now priced higher as the loonie continues to fall.

Fiscal policy measures need sooner rather than later

The Liberal government got into power last year on a platform of stimulus, but like market watchers they expected to reach a deficit well into the rule, not start with one as the final budget report showed. Given the limited runway left to the Bank of Canada for rate cuts (0.50 percent) before going into negative territory, more is demanded of the government. Finance Minister Bill Morneau has been active in sending a message of reassurance as the government will follow through on its promises to invest in infrastructure and fiscal stimulus. The budget will be presented in March, but the timetable to discuss some of the new measures has moved up, given the sudden drop in energy prices.

CAD events to watch next week:

Wednesday, January 20
8:30am CAD Manufacturing Sales m/m
8:30am USD Building Permits
8:30am USD CPI m/m
10:00am CAD BOC Monetary Policy Report
10:00am CAD BOC Rate Statement
10:30am USD Crude Oil Inventories
11:15am CAD BOC Press Conference
Friday, January 22
8:30am CAD Core CPI m/m

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar [1]

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza [6]

Senior Currency Analyst at Market Pulse [7]
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
Alfonso Esparza

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