USD/CAD Loonie Falls Ahead of FOMC Minutes After Oil Drop

USD/CAD Loonie Falls Ahead of FOMC Minutes After Oil Drop

By Alfonso Esparza on Jan 6, 2016 10:11:44 GMT

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The USD/CAD was trading above parity two years ago to the day. The monetary policy rate divergence and the drop in the price of commodities have depreciated the CAD to current levels. The price of oil continues to be driven by a supply glut as producers are hitting record levels of production, with a shrinking demand for the black stuff. Oil is encountering some support from political conflict as Iran and Saudi Arabia engage in a war of diplomacy, but overall the market continues to be more focused on supply far outstripping demand pricing crude lower.

Canadian fundamentals continue to deteriorate as the economy has not found a way to offset the losses from the price of oil that has plunged from over $100 to below $35. The Bank of Canada gets credit from calling out the dangers of a sustained low oil price and proactively cut interest rates twice in 2015. There is little expectation of a repeat of that in 2016, but lack of action from the Federal Reserve and a continued weakness from crude prices might force the hand of governor Stephen Poloz. He is scheduled to speak in Ottawa as part of the mayor’s Breakfast series, but given the opportunity he is expected to use the opportunity to talk about the Canadian economies and the challenges it is facing.The CAD has depreciated 22 percent in the last two years as the two central banks have taken divergent paths to boost economic growth. The U.S. Federal Reserve finally hiked interest rates on December 16, 2015 and the next decision from the Bank of Canada (BOC) will probably be another rate cut. The Canadian economy was able to come out of the credit crisis in solid footing thanks to its stable financial sector and the price of oil at the time. As more signs appeared that producers would be engaged in a price war and keep pumping at record levels that safeguard disappeared for the Canadian economy. New technologies that benefited Canada are also to blame for the plummeting price of crude as shale disrupted traditional drilling methods, that resulted in old wells having a new life. With record low rates financing for new investment in shell extraction became easy to come by resulting in more producers large and small expanding the industry.

The trade balances of Canada and the United States will be released tomorrow at 8:30 am EST. Both are expected to print deficits but the Canadian numbers are expected to be smaller than those posted last month. The weak currency has not given Canadian exports the boost needed, as manufacturing was hurt by the loonie at parity and has not been able to rebuild from that time as most of the manufacturing base has moved on to greener pastures. Not unlike the situation in Japan, now that manufacturing has been outsourced or off shored the service sector is the only one fluid enough to adapt and turn the loonie’s weakness into a competitive advantage. But it still remains to be seen if the gains in the services sector can fill out the big shoes left by the struggling energy sector as the price of oil is not near bottom.

CAD events to watch this week:

Wednesday, January 6

8:15am USD ADP Non-Farm Employment Change

8:30am CAD Trade Balance

8:30am USD Trade Balance

10:00am USD ISM Non-Manufacturing PMI

2:00pm USD FOMC Meeting Minutes

7:30pm AUD Trade Balance

Thursday, January 7

8:25am CAD BOC Gov Poloz Speaks

8:30am USD Unemployment Claims

7:30pm AUD Retail Sales m/m

Friday, January 8

8:30am USD Non-Farm Employment Change

8:30am USD Unemployment Rate

8:30am CAD Employment Change

8:30pm CNY CPI y/y

*All times EST

For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

About Alfonso Esparza

Senior Currency Strategist, OANDA, Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, he 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 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. Follow on Twitterand on his Google+ profile.

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