USD/CAD Loonie Flying High Ahead of FOMC

The Canadian Dollar Rose to a 10 Month High After Oil Price Surge

The USD weakness ahead of the April Federal Open Market Committee (FOMC) on Wednesday, April 27 2:00 pm EDT has given the CAD some traction to appreciated along with the price of crude. The loonie is trading under 1.26 for the first time since July 2015. West Texas crude is back above $44 in anticipation of lower than expected inventories in the U.S. The aftershock of the Doha agreement failure has not really hit the market with output still near record highs. The high price will incentivize producers to keep pumping and could bring back online projects halted because of the price slump.

The USD/CAD has lost 0.388 percent in the last 24 hours. The market expects the April FOMC statement to leave rates unchanged and has depreciated the USD against majors even after the European Central Bank (ECB) made clear that they will continue to ease until the EU finds its way back to growth. The CAD has been boosted by positive domestic data thanks to strong exports and retail sales numbers, although the biggest driver of the loonie has been the price of crude.

Oil Rises to Highest Level in 2016 on Weak USD

U.S. inventories are seen shrinking and that along with a weak dollar with no action expected form the Fed in April has taken oil prices to year to date highs. The failure to reach an oil output freeze agreement in Doha had short lived effects. First the strike in oil workers in Kuwait reduced output until positive output cap headlines started once again pouring in.

There is a lot of uncertainty surrounding oil producers as the market has yet to see a deal that is close to being struck on oil production. Global production is far outpacing demand and only the battle for marketshare has taken out some competitors as prices plummeted. Now with an obvious rebound it remains to be seen if its sustainable or if will be a self fulfilling prophecy. Higher prices to once again trigger record levels of production and depreciate crude.

The effects of the Fed’s FOMC April statement will be felt across the forex market. Oil will continue to guide the CAD for better or worse as fundamentals take a backseat to price action. The monetary policy divergence between the U.S. Federal Reserve and the Bank of Canada (BoC) is not expected to change in 2016 as questions abound on how many rates can the Fed really get to in an U.S. presidential election year. The BoC Governor Stephen Poloz yesterday said that it would take a significant economic shock for the central bank to consider a further rate cut. The Fed on the other hand has kept their options open, even cutting rates which has further hit the USD as it loses the ground gained when the global markets expected the Fed to lead to way to higher interest rate costs around the world.

The Canadian economic calendar will close the week with the release of the February gross domestic product (GDP) on Friday, April 29 at 8:30 am EDT. The forecast calls for a lower reading than in January although the surprise performance of the retail sales data could improve the final number.

CAD events to watch this week:

Wednesday, April 27
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Statement
2:00pm USD Federal Funds Rate
Thursday, April 28
1:00am JPY BOJ Outlook Report
Tentative JPY BOJ Press Conference
8:30am USD Advance GDP q/q
8:30am USD Unemployment Claims
Friday, April 29
8:30am CAD GDP m/m
Saturday, April 30
9:00pm CNY Manufacturing PMI

*All times EDT
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