USD/CAD – Loonie Soars as NFP Wage Growth Disappoints

The Canadian Dollar was Boosted by Strong Non Resource Exports as US Employment Falters

The loonie had a positive week as it is trading at levels not seen since early December of last year. The price of oil that plummeted at the beginning of 2016 is now gaining after the actions of the Organization of the Petroleum Exporting Countries (OPEC) and Russia plans to freeze output. The USD which was riding high on interest rate differentials is now weaker as economic fundamentals have stalled. Friday’s U.S. non farm payrolls (NFP) gave evidence of the mixed results as the headline number of jobs increased by a staggering 242,000, but overall wages were down last month.

The Canadian dollar was given a boost by the growth in January exports in particular in non resource based sectors. Canadian exports rose for a third consecutive month in January. The non resource nature of the growth in exports (consumer goods and vehicles) boosted the CAD as it validates the words of the BOC ahead of its rate statement on Wednesday. Export volume rose by 3.6 percent from December at a pace not seen since May, 2014. Bank of Canada (BoC) Governor Stephen Poloz had commented that the weaker loonie would give Canadian exports a competitive edge. The rest of the trade report is not as positive as the deficit continues to widen, although it did at lower than expected at 655 million Canadian dollars.

The Bank of Canada (BoC) and the Canadian government have done their part to stoke optimism in the economy. The BOC was proactive in 2015 with two rate cuts and while seemingly pondering a cut in January it held off awaiting the yet to be released federal budget. The Liberal government was elected on a campaign of stimulus despite running a higher deficit. Economists agree that monetary policy is tapped out in this case and fiscal policy and infrastructure investment should be favoured. The biggest question mark that remains for March 22 when the budget is release is how big will the measures be with estimates circulating around 20 billion Canadian dollars.

The USD/CAD finished the week lower by 0.576 percent in the last 24 hours. The CAD had a strong week after the USD depreciated 1.45 percent as the greenback is struggling compared to all major pairs. Next week will be key for the Canadian dollar as it will have a chance to control its own fate with major releases from the Bank of Canada, housing and employment data.

BOC to be Pleased with Canadian Fundamentals and Oil Price Stability

The Bank of Canada (BoC) was put on the spot in January as energy prices tumbled as supply was at a record high and the sanctions on Iran were lifted. The Canadian dollar has been highly correlated to oil shocks and in the first two months of the year it was tied at the hip with oil prices. The central bank instead opted to wait for the release of the Government’s budget. The Liberal party won the elections last year with a promise to boost spending in infrastructure to stimulate growth and diversity the economy from its resource dependancy. The budget will be released on March 22 and market watchers anticipate the BOC will stick to the script and wait for the imminent arrival of the Federal budget.

Oil prices are stable after the Organization of the Petroleum Exporting Countries (OPEC) members (minus Iran) and Russia are planning a summit later this month to discuss a potential output freeze. All things considered the world will continue to be awash in the black stuff after Iran ups its production, but the effort from producers to stop the oil price decline appears to be working. Given how hard it was to get producers to agree to discuss the freeze it would not be a shock if it all ends badly.

The biggest domestic challenges for Canada going forward are the overheating of the real estate market due to record low interest rates and the potential backlash from the Federal budget on March 22 as Canadians tend to be deficit adverse which could end up eroding some of the new government’s political capital.

CAD events to watch this week:

Tuesday, March 8
8:15 am CAD Housing Starts
8:30 am CAD Building Permits m/m
Wednesday, March 9
10:00 am CAD BOC Rate Statement
10:30 am USD Crude Oil Inventories
Thursday, March 10
8:30 am CAD NHPI m/m
8:30 am CAD Capacity Utilization Rate
4:15 pm CAD BOC Gov Poloz Speaks
Friday, March 11
8:30 am CAD Employment Change

*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