The Canadian Dollar is Appreciating Due to a Weak USD and a Surging Oil Price
The CAD hit a 10 month high after the release of the advanced U.S. gross domestic product. The U.S. economy grew by 0.5 percent in the first of three readings for the first quarter of 2016. The estimated GDP will get refined with 2 more releases, but at first glance it shows the U.S. economy is slowing down after an uneven 2015.
Central banks were the main drivers of market activity, but they made their mark not with their actions but by staying in the sidelines. The market expected the Fed to sit this one out and if possible send out a few hints on monetary policy for the next two meetings. The April Federal Open Market Committee (FOMC) statement on Wednesday was almost a word-for-word reprint of the March statement which did not hint strongly at June, but also did not discount there being a rate hike.
The Bank of Japan did shock and unlike their now famous “Halloween Surprise” from 2014 the central bank did not add to its quite large stimulus program. The JPY appreciated 3.2 percent as there are concerns that the BOJ might be out of ammunition even as it has said that the value of the currency. Keeping with central bank rhetoric BOJ Governor Haruhiko Kuroda said that they will wait for the effects of negative rates before committing to more monetary policy actions.
The USD/CAD lost 0.742 in the last 24 hours. The USD has been on the back foot since the March FOMC made it clear that there would be less rate hikes from the Fed this year than previously thought. The April FOMC did little to change that and while not taking a June rate hike off the table, the odds are still low; which is translating into USD weakness. The CAD continues to build on the soft U.S. data and the surge in oil price. The high correlation with crude has taken the loonie to 10 month lows. The USD/CAD is trading above the 1.25 price level after the weaker than expected U.S. advanced gross domestic product (GDP).
The Canadian economy has posted positive data since the market shock in January as Chinese equities and the price of oil spiralled downwards. The Canadian GDP reported monthly has surprised to the upside for two months in a row and while the data released in April is forecasted as a slight slowdown at -0.1 percent. The weakness of the CAD in the first quarter could boost the economy to post a gain although it probably won’t be as large as the 0.6 percent released at the end of March.
The Bank of Canada (BoC) has been optimistic about the resource based economy’s ability to diversify with a potential target of 2 years. The rise in the price of oil will make this diversification difficult as it will also trigger currency appreciation making exports less competitive. It remains to be seen if the U.S. slowdown is a transitory effect or a sign the Fed will needs to worry. The demand for energy has not risen substantially which means all the strength in crude prices rests on the shoulders of the oil production freeze agreement. Even when the Organization of the Petroleum Exporting Countries (OPEC) and Russia agreed to disagree the price of oil remained bid. The next meeting will be key as a production freeze will be a good start, but without growing demand will still result in a supply glut.
Canadian data will make an impression as monthly GDP will be released on Friday, April 29 at 8:30 am EDT. Even with small contraction expectations the Canadian economy has defied forecasts of late and the softer loonie in the first quarter could still boost growth even as Canada’s largest trading partner seems to be slowing down.
CAD events to watch this week:
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