The Canadian dollar is lower against the greenback on Friday. The loonie will end the week on a negative note despite the US dollar rally losing momentum after US retail sales and inflation data missed estimates. Oil prices lost half a percentage point on Friday, but after the surge in prices will end up advancing 3.6 percent on a weekly basis. The high correlation between oil prices and the loonie was interrupted by the unexpected downgrade of the six major Canadian banks by Moody’s on Wednesday. The ratings agency cited high debt levels and a hot housing market for cutting the credit rating by one notch as it makes the banks more vulnerable to downsides risks facing the Canadian economy.
Canadian home prices rose for the fifteenth month in a row. Prices rose 1.2 percent in April with Toronto and Hamilton growing at 2.6 and 2.1 percent respectively. Year over year growth of 26.3 and 22.9 percent for both cities reaching record high prices. The Canadian housing market has been solid, as the economy navigated the fallout of the US crisis with the help of oil prices that were higher at the time. Historic low interest rates have increase the level of household debt that is now a huge concern as the U.S. Federal Reserve has started ramping up interest rates and the price of oil continues subdued with stagnant global demand for energy. That is the main reason for the Moody’s downgrade of the six largest Canadian banks, the level of exposure to Canadian household in a highly speculative housing market.
Canadian Finance Minister Bill Morneau had a sideline meeting at the G7 with his US counterpart Steven Mnuchin. Morneau defended Canadian lumber calling the duty baseless, but is looking forward striking a fair and balanced NAFTA renegotiation. The Trump administration has walked back comments on pulling out of the trade agreement outright and is now willing to negotiate, with the warning that it will bring massive changes. If the changes are anything like the pre-amble the US can expect Canada and Mexico to push back which could have negative outcomes for all nations involved.
The USD/CAD gained 0.148 in the last 24 hours. The currency pair is trading at 1.3724 near sessions highs. The pair broke under the 1.37 price level after the release of US retail sales and inflation data missed the forecast. The market repriced the move as it appeared to be insufficient to deter the U.S. Federal Reserve from hiking rates in June. Phily Fed President Patrick Harker said today that two more rate hikes this year are appropriate citing the robustness of the labor market. The rate divergence between US and Canadian interest rates will keep the USD bid ad the Bank of Canada (BoC) has been on the sidelines since 2015 when it cut twice.
Canadian inflation data to be released on Friday, May 19 at 8:30 am EDT. The consumer price index has been under the central banks target as energy and food prices have dropped. Even taking those volatile items from the equation there is still a lack of inflationary pressure. Bank of Canada (BoC) Governor Stephen Poloz said a rate cut is out of the table because of the signs of the improving economy, however he also mentioned that the rebound could prove to be unsustainable. This neutral stance will offer no support to the Canadian dollar as
The price of crude gained 3.08 in the last week. West Texas is trading at $47.59 after a massive drawdown of weekly inventories in the US ended a string of losses for energy prices. The Organization of the Petroleum Exporting Countries (OPEC) has also been active with comments around the success of its production cut agreement and the high probability of an extension to be announced at the meeting with other major producers on May 25.
The Energy Information Administration (EIA) reported a 5.2 million barrels draw for the week ending May 5. Gasoline inventories fell by 200,000 which is feeling optimism ahead of the start of the US driving season. The drawdown in US energy stocks boosted the price of oil as it lined up with OPEC’s release of data confirming their production limits, but the fact that there is low demand for energy and US producers, not bound by any agreement, are ramping up production to take advantage of current price levels will keep the price of crude volatile.
Canadian market events to watch this week:
Wednesday, May 17
8:30am CAD Manufacturing Sales m/m
10:30am USD Crude Oil Inventories
Thursday, May 18
8:30am CAD Foreign Securities Purchases
Friday, May 19
8:30am CAD CPI m/m
8:30am CAD Core Retail Sales m/m
8:30am CAD CPI m/m
8:30am CAD Retail Sales m/m
8:30am CAD Core CPI m/m
*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar 
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