The Canadian dollar fell agains the US dollar on Friday despite the US dollar failing to gain traction. The loonie dropped once the Consumer Price Index (CPI) for May was lower than expected at 0.1 percent. Annual inflation dropped to 1.3 percent after coming in at 1.6 percent in April. The Bank of Canada (BoC) had surprisingly put on the table talk of a rate talk after Deputy Governor Carolyn Wilkins and Governor Stephen Poloz made hawkish comments last week.
The market was pricing in a 50 percent probability of a rate hike as early as July, but the weak inflation data could push that decision back. The October monetary policy meeting was thought to be a perfect fit for the BoC. The October 25 meeting would be more than a month after the September Federal Open Market Committee (FOMC) and Poloz could make a decision confident that either the Fed has hiked or the hike is yet to come with December being the most likely candidate. If inflation does indeed give the central bank more time to ponder its shift to a tighter monetary policy it could also wait until January to keep up with the Fed if there is another 25 basis point bump to the US interest rate.
The USD/CAD gained 0.275 percent on Friday. The currency is trading at 1.3263 after a disappointing CPI reading of 0.1 percent putting inflationary pressures at a slow pace. The soft inflation data reduced the possibility of a July interest rate hike by the Bank of Canada (BoC).
The loonie is being guided by X factors. 1)The price of oil has historically shared a strong correlation given the importance of the commodity as part of GDP. Oil prices have been weaker as low demand has been met with steady supply creating a glut. 2)NAFTA renegotiations are hovering over the currency as the Trump administration started the process in a combative mode. Three quarter of Canadian exports go to the United States and a change in that trade relationship would be significant on either direction. 3) Monetary policy winds have shifted starting the Fed. Single rate hikes per year in 2015 and 2016 have been followed by 2 rate hikes this year by the Fed putting the Fed funds rate in a 100–125 basis points. The BoC first put another rate cut off the table earlier in the year as the economy had a strong first quarter and hints of a continuation of the trend in the second quarter triggered the hawkish comments. Rising household debt could trump weak inflation as the central bank would rather introduce gradual change to avoid a sudden impact to Canadians.
The USD/CAD has gone from a high of 1.3350 to a low of 1.3220 after the BoC comments only to slowly climb back as Fed speakers have mostly been repeating the same comments. More rate hikes coming and a reduction of the balance sheet sooner rather than later. Only a few dovish members have strayed from those comments, and even then only walking back the aggressive rate hike path, but agreeing on the need to reduce the 4 trillion accumulated during its quantitative easing program.
The price of energy fell 0.375 percent in the last 24 hours. West Texas Intermediate is trading at $42.79 in a week where crude has fallen more than 4 percent due to oversupply concerns. The weakness of the USD has kept the price of oil near the $42 price level, but growing supply from US producers has been offsetting the effect of the oil production cut extension between OPEC and other major producers.
Oil started the week around the $44.59 price level before losses accumulated on a daily basis and not even the drawdown of US crude inventories on Wednesday was enough to reverse the trend. Uncertainty about the stability of the Organization of the Petroleum Exporting Countries (OPEC) after the appointment of the new Saudi Arabia crown prince did not boost prices as OPEC members Libya and Nigeria have sorted their supply disruptions leaving the market still caught in a glut of crude.
Market events to watch this week:
Monday, June 26
4:00 am EUR German Ifo Business Climate
8:30 am USD Core Durable Goods Orders m/m
Tuesday, June 27
10:00 am USD CB Consumer Confidence
Wednesday, June 28
10:30 am USD Crude Oil Inventories
Thursday, June 29
8:30 am USD Final GDP q/q
8:30 am USD Unemployment Claims
Friday, June 30
4:30 am GBP Current Account
8:30 am CAD GDP m/m
*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar