USD/CAD Canadian Dollar Lower as Oil Tumbles after Higher US Inventories

The Canadian dollar lost ground against the U.S. dollar after the release of U.S. crude inventories. While oil was down more than 2 percent the Canadian currency was able to manage a slight depreciation and continues to trade below 1.30. The USD has not managed to gain total traction ahead of the start of the Jackson Hole central bank summit in Wyoming on Friday, August 26. U.S. Federal Reserve Chair Janet Yellen’s speech is heavily anticipated after the central bank members have sent mixed messages to the market.

Commodity currencies, specially those linked to oil have been volatile as the Organization of the Petroleum Exporting Countries (OPEC) has been talking up the possibility of a oil output freeze agreement after the failure in Doha earlier this year. Iran could not participate in March as it could not cap its production until after reaching pre-sanction levels and Saudi Arabia went for an all or nothing argument, which ended the Doha meeting with a failure to cap production. Producers have since broken new records, but the meeting at the end of September in Algiers could bring about an agreement to limit production. The effect could be limited as there are multiple signs that without a significant surge in the demand for energy there will continue to be a glut of oil as producers will stick to what are record levels of output.

The USD/CAD lost 0.201 percent in the last 24 hours. The pair is trading at 1.2925 as the Canadian dollar manages to trader under the 1.30 price level despite the surprise buildup of oil in the U.S. The CAD has been heavily correlated to the price of oil as the OPEC and other producers are fighting to contain a drop in prices. Canadian fundamentals have been weak, but the government and the Bank of Canada (BoC) have acknowledged that the nation needs to diversify and have pushed to turn to other sectors for growth until natural resource prices rise.

West Texas oil lost 2.844 percent in the last 24 hours. The price of crude is trading at $46.09 after the release of the U.S. crude inventories by the Energy Information Administration (EIA). Oil stocks rose by 2.5 million barrels last week after a slight drawdown was forecasted. The glut in oil supply despite the U.S. driving season highlight the lack of demand of energy even as the Organization of the Petroleum Exporting Countries (OPEC) is trying to reach an oil output freeze agreement.

News that Iran was willing to participate in the Algiers OPEC meeting next month drove prices higher, only for them to crash down after the release of the U.S. inventories. The reality of oil production is that the market share wars have put more supply than what is needed. Producers are engaging in a price war that can only be sustained by those nations with deep pockets. OPEC members are divided as some like Venezuela need a higher price of crude to balance their budget. Saudi Arabia has been driving the market share grab by pumping at record high levels in an effort to drive shale producers out of business.

The USD got a boost from higher house sales, but the market expectations on the next move from the U.S. Federal Reserve will not let up, until after the speech of Chair Janet Yellen is known. The Fed could dissapoint in Jackson Hole as the anticipation from investors does not guarantee the central bank will diverge from their “data depndant” stance and opt to keep their optimistic view on the U.S. economy, but not commit to any dates on the timing for the next interest rate hike. The CME FedWatch tool is showing a rise in probability of a rate hike in September measured by Fed rate futures interest, but is still a low 24 percent.

Market events to watch this week:

Thursday, August 25
4:00am EUR German Ifo Business Climate
8:30am USD Core Durable Goods Orders m/m
8:30am USD Unemployment Claims
Friday, August 26
4:30am GBP Second Estimate GDP q/q
8:30am USD Prelim GDP q/q
ALL DAY Jackson Hole Economic Policy Symposium

*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