USD/CAD Loonie Rises as Oil Surges due to Supply Disruptions

The Canadian dollar regained some ground versus the U.S. dollar on Tuesday as the price of oil rose more than 2 percent due to a curb in production in Canada and Nigeria. Wild fires in Alberta have reduced daily output in the Canadian oil sands, while unrest and sabotage have reduced Nigerian output. The reduction has been estimated at 500,000 to 1.6 million daily barrels in Canada and a 22 year low for Nigerian production.

The USD calendar will not have any fundamental data to guide traders for most of the week, but will close with the U.S. retail sales on Friday 13. The core retail sales is expected to improve on previous readings at 0.6 percent growth. Adding the volatile auto component is forecasted to bring down retail sales to -0.3 percent in April.

Next up for the Canadian dollar will be the release of the U.S. crude oil inventories on Wednesday at 10:30 am. The United States remains the biggest destination of Canadian oil and a reduction of inventories would boost global crude prices. The good news for Canada is that the disruption is temporary with energy companies rushing to get back online, the biggest long term problem is the disconnect between supply and demand as producers battle for marketshare with no end in sight to record production levels.

The USD/CAD fell 0.532 percent in the last 24 hours. The Loonie was boosted by the recovery of crude prices and the pair is trading at 1.2942 but remains range bound between 1.3010 and 1.2920. Trade and employment numbers have depreciated the CAD, leaving the currency with the price of energy as the main driver. The volatility in crude as the uncertainty about an oil freeze agreement continues makes the price sensitive to swings as new information reaches the market.

West Texas oil surged 2.07 percent to trade at $43.89. Outages in Canada due to a continuing wild fire and unrest in Nigeria have accomplished what the Doha talks failed to do and stabilized the price of crude.

The Organization of the Petroleum Exporting Countries (OPEC) remains divided in principle about a potential output freeze with Iran and Saudi Arabia in two sides of the dispute. Iran wants to regain the production levels it had before the western sanctions and to match OPEC members who are pumping at record levels. Saudi Arabia wants a full OPEC agreement and will not sign a deal with Russia and other big producers unless Iran signs as well. The disruption to production from Canada and Nigeria have countered the obvious glut of crude. Demand has not risen enough to offset the larger supply and only political unrest or natural disasters have been able to curb the amount of oil that enters the market.

The Canadian economy has suffered downgrades from Canadian banks TD, RBC and BMO that have forecasted a flat to negative growth in the second quarter of 2016. The downward pressure on the economy could bring the Bank of Canada (BoC) back into action sooner than originally anticipated. The BoC was active in 2015 and decided to partner with the Canadian government and wait for the effects of the fiscal stimulus announced in March. The effects of which would not be felt until the fall, that being the reason the Canadian central bank was not expected to make any monetary policy moves until 2017. The impact of the wild fires and the trade deterioration could bring about a rate cut, in particular if things south of the border also change drastically with the Fed in a patient mode that could easily turn to tightening if the U.S. economy stalls.

USD/CAD events to watch this week:

Wednesday, May 11
10:30 am USD Crude Oil Inventories
Thursday, May 12
8:30 am USD Unemployment Claims
Friday, May 13
8:30 am USD Core Retail Sales m/m
8:30 am USD PPI m/m
8:30 am USD Retail Sales m/m
10:00am USD Prelim UoM Consumer Sentiment

*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