USD/CAD Canadian Dollar Lower After CETA Evaporates

The Canadian dollar is lower after oil prices retreat and Fed Members talk up December rate hike

The loonie started the week on a negative tone. The Canadian currency is lower versus the USD as members of the U.S. Federal Reserve even when they used dovish rhetoric were all supportive of a rate hike in December. The main difference is that for some members of the American central bank a single rate hike is all that is needed as rates will continue to be low, and for others more hikes are needed down the line as inflation is expected to rise. The immediate result is a stronger USD as a rate hike in December is a near reality.

The Bank of Canada (BoC) maintained today its 2 percent inflation target for the next five years as expected. The Canadian central bank cut interest rates twice in 2015, but so far in 2016 it has kept in the sidelines. The Federal government issued a fiscal stimulus in March but so far it seems it was not enough to boost growth, which is why the BoC might cut rates again. With a benchmark rate at 0.50 percent there is not much room to cut, so the timing of the decision by Stephen Poloz depends heavily on the Fed and other central banks. In order to have the biggest impact the BoC has to find the right balance between going after the Fed to maximize the depreciation of the CAD, but could run into trouble if inflation due to imports starts heating up.

The Canadian government has moved to curb the housing bubble that resulted as low rates have remained. Tax incentives have been revised to reduce non-residents from taking advantage of surging prices and tougher mortgage rules will also limit the amounts being borrowed. Those two factors will cool the real estate market, but since it was headed into the winter months it will be hard to quantify how much if any was the result of the newly introduced measures or just a seasonal effect.

The USD/CAD has gained 0.436 percent in the last 24 hours. The pair is trading at 1.3395 and is near the 1.34 price level after the retreat in oil prices and positive U.S. Fed member comments on the December interest rate have given a boost to the USD versus the Canadian currency. The drop in energy prices after the comments from the Iraqi energy minister and the probability rise of a Fed rate hike in December have pushed the CAD close to a low not seen since March. This week will bring little data to support the loonie with all eyes on the U.S. crude inventories to be released on Wednesday. A buildup is expected after surprise drawdowns in the last weekly report which could offset the losses from the oversupply anxiety.

West Texas has lost 2.165 percent in the last 24 hours. The price of energy is trading at $49.44 after Iraq cast doubts it will participate in the Organization of the Petroleum Exporting Countries (OPEC) production limit deal and is seeking an exemption. Iraqi oil minister Jabar Ali al-Luaibi made comments on Sunday that more funds are needed to fight Islamic State militants and would not fully participate in the production cuts. The record high levels of supply from OPEC and non-OPEC producers had the price of oil at dangerous lows at the beginning of the year and only the idea of collaboration was able to add stability to the energy sector. The OPEC has not been able to sell the idea of a cohesive approach as first the Iran/Saudi Arabia feud drove the Doha summit into failure and now Iraq seen breaking ranks ahead of the meeting in Vienna send the wrong signal to the markets.
Market events to watch this week:

Tuesday, October 25
4:00 am EUR German Ifo Business Climate
10:00 am USD CB Consumer Confidence
10:35 am GBP BOE Gov Carney Speaks
11:30 am EUR ECB President Draghi Speaks
8:30 pm AUD CPI q/q
Wednesday, October 26
10:30 am USD Crude Oil Inventories
Thursday, October 27
4:30 am GBP Prelim GDP q/q
8:30 am USD Core Durable Goods Orders m/m
8:30 am USD Unemployment Claims
Friday, October 28
8:30 am USD Advance GDP q/q

*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