USD/CAD Canadian Dollar Lower After OPEC Deal in Doubt

The Canadian dollar depreciated on Wednesday despite a lower than expected U.S. crude inventories number. Oil stocks in the U.S. dropped by 600,000 barrels last week which was below the forecasted 700,000 buildup that was expected. The price of oil started a downward trend in the Asian session once the API inventory data showed a 4.8 million barrels increase, but crude quickly recovered with the release of the The U.S. Energy Information Administration (EIA) report only to give back gains once Organization of the Petroleum Exporting Countries (OPEC) deal anxiety took hold of traders. With a month to go before the meeting in Vienna there are a growing number of members asking to be included in the exemptions. The most prominent is Iraq due to the its massive volume of production. The OPEC production cut agreement is now dependant on Russia joining it, otherwise there is little hope it has a significant impact on crude prices.

The Canadian currency has been linked to oil prices as the correlation between the two are still high. The Canadian economy became heavily dependent on commodity prices that with the drop in oil prices the situation for the Canadian economy has worsened. The Bank of Canada (BoC) Governor made two pro-active cuts to the benchmark interest rate in 2015 based on the forecast that energy prices will tumble lower, and they did. In 2016 the BoC has remained in the sidelines, then again so has the U.S. Federal Reserve. The Canadian central bank is running out of options as the rate stands at 0.50 percent but it has not discounted negative rates and other unconventional monetary policy tools to boost the economy.

Governor Poloz has stressed that in the current economic climate just having a weak currency is not enough to boost exports. The interconnected economy demands a better competitive advantage that just low prices and Canada is struggling to discover just what that advantage is, as natural resource prices remain soft.

The USD/CAD rose 0.213 percent in the last 24 hours. The currency pair is trading at 1.3364 with the loonie losing ground versus the U.S. dollar due to the fall in energy prices. The blow dealt to the Canada Europe Trade Agreement (CETA) by the Wallonia region in Belgium appears to have been fatal as there is little time to reach an agreement under the deadline despite support from other European nations.

The vast majority of Canadian exports go south to the United States and the trade deal would have opened another market in particular for non-resourced based goods that the government is trying to foster. As it stands another round of negotiations will have to happen before arriving to a similar stage. A great chance has been missed. It is unclear how things will change after Brexit is invoked and a new trade relations are established between the E.U. and the United Kingdom.

The rest of the week for CAD traders will include the release of the U.S. durable goods numbers on Thursday and the main event this week the flash gross domestic product (GDP) out of the United States. U.S. growth appears to be gaining momentum, which will translate into a stronger dollar as it ultimately validates the anticipation ahead a December rate hike. The BoC is expected to remain patient as long as the Fed acts, otherwise the Canadian central bank might be forced to intervene.

West Texas dropped 1.377 percent on Wednesday. The price of oil is trading at $48.77 after doubts persist on OPECs ability to reach a deal and try to curb rising oil supply levels. The price of oil fell even though U.S. crude inventories showed a drawdown of 553,000 barrels when a small buildup was expected.

Market events to watch this week:

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