Oil Market and US Turmoil Biggest Driver as Loonie Awaits Sales and Inflation Data
The Canadian dollar has had a volatile week. On Wednesday afternoon the loonie broke through the USD/CAD 1.36 price level but a sudden drop during the Asian session on Thursday put the CAD under pressure. The Canadian currency depreciated and the pair touched 1.3670, the daily high, before it appreciated to current levels (1.3605).
The USD dollar is mixed against major pairs. The pound, loonie and Aussie are gaining, while the Swiss franc, kiwi, euro and yen are in negative territory. With little fundamental data to go on the greenback has been traded on political risk and the potential damage to the American economy. Global stock markets have lost momentum as the developing story on the Trump administration continues to unfold.
The political turmoil in Washington is making it less likely that the pro-growth policies promised after the election will be enacted. Tax reform and infrastructure spending were top of the economic agenda, but were pushed down in favor of immigration and healthcare reform which proved to be too divisive. The Trump administration is running out of political capital and scandals will sap it even more.
The USD/CAD lost 0.074 in the last 24 hours. The pair is trading at 1.3605 after the oil rally lost momentum but US political drama has the USD on the back foot. The U.S. Federal Reserve was probably counting on strong reforms in the first half of the year with a Republican president in the White House and a Republican majority in the House and Senate. Fed officials are still optimistic about multiple rates hikes as per their comments, but the markets have begun to price out a move but the central bank in June. Last week the probability calculated by the CME in their FedWatch tool was 83.1 percent and today it stands just below 70 percent.
Retail sales and inflation data will be released on Friday, May 19 at 8:30 am. The latest economic data out to Canada has disappointed and the warning signs of an overheated real estate market have cause downgrades to the otherwise solid Canadian banks. Manufacturing sales were close to the forecast with a 1 percent growth and are preparing the market for an improvement on the retail numbers. Retail sales are forecasted to have gained 0.4 percent and the core data 0.2 percent. Inflation numbers are also expected higher at 0.5 percent. The biggest Canadian economy question that remains for the most part unanswered is its future trade relationship with the United States. Which more than three quarters of products going to the US there is a lot riding on the NAFTA negotiations. The Trump administration has been on the offensive since taking office and America first will be something that Canada will have to negotiate down from.
Prime Minister Justin Trudeau was in Seattle to attend a Microsoft CEO summit. Finance Minister Bill Morneau and Bank of Canada (BoC) Governor Stephen Poloz met with their counterparts during the G7 meeting in Italy last week and the topic is sure to have been brought up. Canada has also added more communication with Mexico in order to create a united front when negotiating with the US in last August.
Oil is down 0.68 in the last 24 hours. The price of West Texas Intermediate is trading at $48.66 after investors remain unconvinced the efforts of the Organization of the Petroleum Exporting Countries (OPEC) to extend its production cut agreement will be enough to rebalance the energy market. US production in particular has soared as current price levels are high enough for shale operations.
The price of crude is suffering as the political drama in Washington has investors are uncertain on the outcome and the far reaching implications for the growth of the US economy.
Market events to watch this week:
Thursday, May 18
4:30 am GBP Retail Sales m/m
8:30 am USD Unemployment Claims
Friday, May 19
8:30 am CAD CPI m/m
8:30 am CAD Core Retail Sales m/m