USD/CAD – Loonie Under Pressure Ahead of Bank of Canada Statement

The Canadian dollar reassumed normal trading conditions after the Victoria day long weekend. The loonie has underperformed against the U.S. dollar as Canadian growth has slowed down and the Fed minutes from the April Federal Open Market Committee (FOMC) have once again reignited the possibility of a June interest rate hike.

The Bank of Canada (BoC) will release its May interest rate statement on Wednesday, May 25 at 10:00 am EDT. The Canadian central bank is not expected to change its benchmark interest rate but it is anticipated to downplay expectations with mentions of weaker economic performance and the yet undetermined impact of the Alberta wild fires. The Canadian economy is still forecasted to post an impressive first quarter GDP even after the slowdown in March. The outlook for the second quarter is more uncertain as it depends heavily on U.S. growth and oil price stability which are two factors outside of the control of Canadian policy makers.

Supply disruptions have helped the price of oil remain above $46. Nigeria, Libya, Canada and now France have reduced daily outputs contributing to the price of West Texas trading over $48 per barrel. French oil refinery workers were part of a general strike that protests Prime Minister Francois Hollande labor law proposals. Global demand for crude has not risen to match the pace of Organization of the Petroleum Exporting Countries (OPEC) and Russia who are at record high levels. Once temporary disruptions are settled, the big question mark is how will big producers deal with another supply glut. Citi and Goldman Sachs have both issued calls for the end of the oversupply, yet the price of oil has been boosted to supply constrains not a real surge in demand making prices volatile.

The USD/CAD has advanced 0.63 percent in the last 24 hours. The pair is trading at 1.3144 after the loonie continues to lose ground against the U.S. dollar. The minutes from the April FOMC brought the rate hike back on the table for the June monetary policy meeting. The CAD has been struggling with softer data and oil price volatility which has boosted the USD 1.8 percent in the last week.

The BOC is not expected to change the interest rate as it will stand by its statement of waiting until the impact of the stimulus spending package starts to show itself in results of the economy. Back in January the central bank was in the hot seat as the price of oil plummeted taking the loonie along for the ride as a Chinese stock sell-off drove investor anxiety. Stephen Poloz Governor of the BoC decided to keep rates unchanged as he pointed the finger at the Federal government who had hinted at a stimulus package despite running a deficit. The BoC was proactive in 2015 with two rate cuts that correctly predicted the price of oil would fall more that year. There is not a lot of room left for conventional tactics as the rate stands at record low 0.50 percent but Mr. Poloz has not discounted the use of negative rates.

Economic surveys point to the next move for the Bank of Canada will be a rate hike. The estimated time frame is 1 or 2 years with macro headwinds subsiding and internal demand recovering with the help of a weaker currency.

CAD events to watch this week:

Wednesday, May 25
10:00am CAD BOC Rate Statement
10:00am CAD Overnight Rate
10:30am USD Crude Oil Inventories
Thursday, May 26
8:30am USD Core Durable Goods Orders m/m
8:30am USD Unemployment Claims
Friday, May 27
8:30am USD Prelim GDP q/q

*All times EDT
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