USD/CAD Loonie Lower on Signs of Oil Glut

The Canadian dollar was stable ahead of a busy week. Monday proved to the calm before the storm as few economic releases were released and the USD recovered slightly ahead of tomorrow’s U.S. retail sales data. The CAD will have to wait for Wednesday for supporting data with the release of Canadian manufacturing sales.

The Organization for Economic Co-operation and Development (OECD) endorsed the efforts of the Canadian government to be a test case in deploying fiscal stimulus in order to accelerate growth. It is too early to say if the partnership between the Bank of Canada (BoC) and the government will yield positive results as the package announced in March will start to show its impact in the fall.

The Bank of Canada (BoC) deemed the risks to the Financial system from the Canadian housing sector have been balanced by the improving economy. The rise of house prices in Toronto and Vancouver continue to be a concern as borrowers continue to incur in large debt. Governor Stephen Poloz was optimistic about the economic recovery and is confident that the central bank has made the necessary changes to keep the housing market in check.

The focus of the market will be on the Federal Open Market Committee (FOMC) that will close with the release of the statement on Wednesday at 2:00 pm EDT and the press conference with Chair Yellen at 2:30 pm EDT. The market has all but written off a rate hike and the language of the statement and the answers given by the Fed Chief will give out further insights on the path of the next rate hike.

The USD/CAD has gained 0.084 percent in the last 24 hours. The currency pair is trading at 1.2792 in a low liquidity session where the loonie is stable awaiting the release of the U.S. retail sales tomorrow. The American consumer has been a paradox that has been hard to call for investors. Consumer confidence is high, but it wasn’t until last month that spending was growing on par. Analysts are divided on the strength on last mont’s figures due out tomorrow at 8:30 am. Retail sales are expected at 0.4 percent for both core and headline reports. There is a continent seeing a growth slowdown after last month’s impressive (1.3 percent retail sales and 0.8 percent for core retail sales).

The price of oil was not able to break above $50 after the net result of different factors was negative for crude. The West Texas Intermediate is down 0.016 percent. Continuing disruptions in Nigeria boosted the price of crude early in the North American session, but the number U.S. oil rigs have been on the rise triggering concerns about a more permanent glut of supply in contrast with the more temporary disruptions in Nigeria and Canada.

Fed June Rate DOA But July and September Rising

The FOMC statement released on April 27 provided little clues on what the members of the Fed were thinking. The U.S. economy was seen improving, but after a rough start of the year the market had pared back the number of rate hikes to 1 to 2 this year. That meeting had no press conference so that is all investors had to go on until three weeks later the minutes from that meeting were published. The narrative suddenly changed from a noncommittal central bank with minor modifications to a statement, to a pro-active FOMC that was waiting for enough signals of economic recovery to launch another interest rate hike. The June rate hike went from a non-event to back on the table and sparked a USD rally. Mixed economic data and in particular the weaker than expected NFP that only added 38,000 jobs put probabilities back in single digits.

The CME FedWatch tools is showing a 4 percent probability of a change in interest rates on Wednesday, June 15. The July FOMC (no press conference) has 24 percent of a rate hike, September (press conference) 38 percent, November (no press conference) 41 percent
and December (press conference) 60 percent. It will be interesting to see how the dot-plot released on Wednesday, June 15 matches against market expectations. Given the presidential race will be in full swing in September it could be less likely the Fed will act, leaving July (no press conference) and December (press conference) as the clear options.

Canadian data has been mixed this month and this week offers a similar scenario playing out with Manufacturing sales , crude oil inventories in the U.S. on Wednesday and consumer price index (CPI) on Friday. The Fed’s decision on rates and the language with which they communicate the decision will be the biggest driver of the market and Canadian dollar traders need to be ready in case the U.S. central bank decides to act proactively ahead of what is looking like a contentious presidential election and the more room it can give candidates without Fed intervention the better.

CAD Market events to watch this week:

Tuesday, June 14
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m
Wednesday, June 15
8:30am CAD Manufacturing Sales m/m
8:30am USD PPI m/m0.3% 0.2%
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Economic Projections
2:00pm USD FOMC Statement
2:00pm USD Federal Funds Rate
2:30pm USD FOMC Press Conference
7:55pm CAD BOC Gov Poloz Speaks
Tentative JPY Monetary Policy Statement
Thursday, June 16
Tentative JPY BOJ Press Conference
8:30am USD CPI m/m
8:30am USD Core CPI m/m
8:30am USD Philly Fed Manufacturing Index
8:30am USD Unemployment Claims
Friday, June 17
8:30am CAD Core CPI m/m
8:30am USD Building Permits

*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