USD/CAD Canadian Dollar Higher After Fed Minutes Depreciate USD

The Canadian trade balance brought bad news for the economy early in the North American trade session. The deficit was wider in May at CAD 3.28 billion higher than the forecast of CAD 2.7 billion. Exports have not grown as much as the Bank of Canada (BoC) expected with the depreciation of the CAD. The losses in the commodities sector have been severe, first due to the lower energy prices and second the Alberta wild fires have not been fully accounted for in terms of costs.

The American trade balance also widened in May to a deficit of $41.1 billion as a strong dollar made it hard for exports to grow while cheaper imports were favoured by consumers. The trade deficit between the U.S. and China reached a 8 month high with the E.U. gap also widening.

The Federal Open Market Committee (FOMC) June meeting minutes were released and as expected the concerns with U.S. employment after the disappointing U.S. non farm payrolls (NFP) and the then upcoming Brexit vote kept Fed members from raising rates. There was a division between the Fed with different views on the economic outlook, but in the end caution won. The results of the Brexit vote have validated the patience shown by the U.S. Federal Reserve but as some risk returned to the market the USD was weaker against major pairs.

The USD/CAD lost 0.403 percent in the last 24 hours. The pair is trading at 1.2963. The dovish minutes were put into a new context in the aftermath of the UK EU referendum. If the members of the FOMC did not find the U.S. economic conditions ideal for a rate hike in June, now with the outcome of the vote they become less so. The market had already started pricing in a lack of Fed hikes for this year and next, but the dovish minutes are lending more credibility to the possibility of negative rates sooner rather than later.

West Texas Oil rose 1.19 percent after the retreat of the USD and boosted the loonie. The price of energy had a volatile session with lows at $45.64 to end up trading near daily highs at $47.03. Energy fundamentals haven’t changed as there is still far more output than expected demand, but with Brexit anxiety still infecting markets there is more volatility expected until there is political stability in Britain.

The Canadian dollar was able to eke out gains versus the USD as it lost the support of risk aversion and the minutes and trade data took its toll on the big dollar. The Bank of Canada (BoC) is expected to hold its rate unchanged next week, but it is anticipated to downgrade its growth forecast for the Canadian economy in 2016. A rate cut is still very much a possibility this year, specially if the macro headwinds continue to gain force after the Brexit referendum has shocked global markets.

Tomorrow will be a quiet day for Canadian releases but the highlight will come with the first of the U.S. employment data for the week. The ADP employment data and the unemployment claims will start painting a picture on the state of jobs in America. The U.S. non farm payrolls (NFP) will be released on Friday with much anticipation and could prove a turning point to a return of market fundamentals after the outcome of the UK referendum.

CAD events to watch this week:

Thursday, July 7
4:30am GBP Manufacturing Production m/m
8:15am USD ADP Non-Farm Employment Change
8:30am USD Unemployment Claims
11:00am USD Crude Oil Inventories
Friday, July 8
8:30am CAD Employment Change
8:30am CAD Unemployment Rate
8:30am USD Average Hourly Earnings m/m
8:30am USD Non-Farm Employment Change
8:30am USD Unemployment Rate

*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