USD/CAD Loonie Surges After Oil Recovers on Demand Optimism

Central bank rhetoric and cold weather boosted crude prices benefiting the CAD

The loonie will finish the week of January 25 on a strong note versus major pairs. Boosted by the recovery of oil prices and stronger than expected economic indicators the Canadian currency advanced close to 1 percent versus the U.S. dollar.

The USD/CAD depreciated 0.912 in the last 24 hours and close to the end of trading is at 1.4152. The Loonie continued its rebound for a second day in a row following the Bank of Canada’s decision to hold rates unchanged and the double boost of strong economic releases and an 8 percent climb for West Texas oil prices.

Oil continues to be the main driver of the CAD and while this week central banks reassured investors that they are ready to act if needed boosting energy demand expectations higher the fact remains that the oil market is oversupplied. The Iran sanctions were lifted last weekend and with some legal and logistical issues to sort it will be a couple of weeks until Iranian crude flows into the market. Russia and Saudi Arabia have made no qualms about pumping at record levels and even though there are some signs of pain for Canadian and U.S. producers there are no supply cuts in the horizon. Energy buyers saw an opportunity and jumped on sub $30 barrels and took the price of WTI to $32

Canadian retail sales surpassed expectations on data delivered this morning. Core retail sales, excluding auto sales, jumped 1.1 percent in November. The full retail sales picture gained even more as auto sales pushed the headline number to 1.7 percent. Both retail figures had forecast around 0.3 percent given the disappointing four previous readings. The strong retail data chips away at the pessimism surrounding the fourth quarter data. The November sales could be a turnaround that find more solid footing in the December holiday period putting less downward pressure on growth of the Canadian economy.

Inflation data released at the same time showed that the effects of a weaker loonie have not resulted in higher inflation expectations. The core CPI data was –0.4% m/m while adding more volatile items made the figure –0.5 percent m/m. Annual inflation continues to be below the Bank of Canada’s target at 1.6 percent and 1.9 for core inflation. Given the fall in the loonie there was a concern that Canada would be importing inflation on products such as food, but that is not as evident from the December data. The fall of oil in the first two weeks of the year depreciated the CAD to a point where inflation forecasts started to envision a higher rate of inflation in the short term. Today’s recovery of oil prices and strong economic indicators have given a boost to the loonie ahead of next week’s Federal Reserve’s interest rate statement.

CAD events to watch next week:

Friday, January 29
8:30am CAD GDP m/m
8:30am CAD RMPI m/m
8:30am CAD IPPI m/m

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

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

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