USD/CAD Loonie Lower as Yellen Talks Up USD

The U.S. dollar advanced versus the CAD thanks to U.S. Federal Reserve Chair Janet Yellen 3 hours of testimony on the Semiannual Monetary Policy Report before the House Financial Services Committee. During the first of two testimonies this week Chair Yellen was hawkish on the U.S. economy, while maintaining a dovish outlook on global affairs.

Yellen in her prepared remarks held to previous Fed rhetoric about gradual increases that of course will be dictated by economic data. The Fed chair based her assessment of the U.S. economy in the strength of the jobs market that saw sustained growth in 2015. 2.7 million jobs were created in 2015 and with January’s additions the unemployment rate is now 4.9 percent. The main causes for underperformance appear to be outside the control of the Fed as they come from the global slowdown. Oil price declines and uncertainty in Chinese financial markets have hit American domestic markets quite hard, with little for the central bank to shield the economy.

The Canadian dollar had a horrific start of the year as a deep correlation above 0.90 with the price of oil made the tumble in the energy market compound the precarious health of the Canadian economy. The Bank of Canada (BoC) had cut rates twice in 2015 and with a benchmark rate of 0.50 there are two rate cuts available to Governor Stephen Poloz. He chose to hold in January and wait instead for the unveiling of the Federal budget in March. The Liberal government ran a campaign

The USD/CAD had a very high negative correlation with the price of oil. Or saying it another way, the Canadian dollar had a high positive correlation with the price of oil in the last year (0.94), 3 months (0.97). A perfect correlation positive or negative is 1 when both assets move in unison. The CAD was in fact joined at the hip with the price of energy, which was bad news for the loonie as the price of crude was dropping like lead. In February some of the correlation has given way, and last week the USD/CAD and oil had a correlation of negative 0.53.

The USD/CAD appreciated 0.34 percent in the last 24 hours. The pair had a gap of 1.30 percent from the high and low of the session as again the price of oil dropped more than 2 percent. The loonie managed to decouple from crude and USD/CAD continues to trade under 1.40.

Tomorrow will see the U.S. Fed Chair Yellen face another grilling although this in front of the Senate Banking Committee. One of the few Canadian economic indicators to be released this week. The Bank of Canada (BoC) and the government have issued warnings about the high levels of household debt that has been triggered by record low interest rates. Prices of new New Housing Price Index (NHPI) will continue to rise and is expected to have risen 0.3 percent since last month’s data. The USD got a small push upward by Janet Yellen’s words on Wednesday, a repeat is not likely given she would be singing from the same songbook. Friday’s retail sales could put downward pressure on the USD if more signs of stagnation appear.

CAD events to watch this week:

Thursday, February 11
8:30am CAD NHPI m/m

*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