The Canadian dollar has reversed some of the week’s earlier losses after the release of the U.S. crude inventories at 10:00 am EDT on Wednesday. The Energy Information Administration (EIA) issued the latest weekly report that showed inventories shrunk by 3.4 million barrels. The forecast called for a 500,000 to 750,000 gain. The shortfall in crude drove energy prices higher and in turn took the CAD along for the ride.
The correlation between the price of oil and the Canadian dollar is strong. The drop in production of Canadian oil sands producers has boosted the price of energy, and in turn have boosted the loonie. The uncertainty surrounding oil prices will continue as the Alberta wild fires rage on and the Organization of the Petroleum Exporting Countries (OPEC) division within its ranks could make a oil production freeze almost impossible to sign.
CIBC has joined the ranks of institutions issuing downgrades to their Canadian economy second quarter growth. TD, RBC and BMO that have forecasted a flat to negative growth in the second quarter of 2016. The downward pressure on the economy could bring the Bank of Canada (BoC) back into action sooner than originally anticipated. The BoC was active in 2015 and decided to partner with the Canadian government and wait for the effects of the fiscal stimulus announced in March. The effects of which would not be felt until the fall, that being the reason the Canadian central bank was not expected to make any monetary policy moves until 2017. The impact of the wild fires and the trade deterioration could bring about a rate cut, in particular if things south of the border also change drastically with the Fed in a patient mode that could easily turn to tightening if the U.S. economy stalls.The USD/CAD has lost 0.545 percent in the last 24 hours. The pair is trading at 1.2846 after the loonie recovered thanks to the crude surge earlier today. West Texas jumped 3.34 percent and is trading at $45.60 with crude oil inventories in the U.S. coming in lower than expected at -3.4 million barrels last week. The decrease acted as a short in the arm for crude even as the overall U.S. stockpile remains near record highs as global supply has created a glut as demand has shrunk.Canadian crude production is on its way back to normal after suffering disruption due to the wild fires in oil rich Alberta. While no oil sands facilities were damaged by the natural disaster, safety concerns meant the closure and evacuation of whole towns that work those facilities. The disaster has put offline about one million daily barrels. The cut in production has helped the price of oil and the loonie, but has put Canada against the ropes as it will mean a severe impact on growth.
Bank of Canada (BoC) Deputy Governor Carolyn Wilkins sounded somewhat optimistic about Canadian growth when earlier today she said: “There are a lot of downside risks, but I would say though that the most likely thing is that the economy is going to keep growing,”. Not exactly the most confidence building argument, but a typical policy maker answer to a complicated issue. Deputy Governor Wilkins outlined the biggest risk still is the Chinese slowdown specially for a still resource dependant economy, despite the best efforts of the BoC. The central bank is still expected to remain in the sidelines for most of this year, but the wild fires and uncertainty about oil prices and China could bring it into action sooner rather than later.
USD/CAD events to watch this week:
Thursday, May 12
8:30 am USD Unemployment Claims
Friday, May 13
8:30 am USD Core Retail Sales m/m
8:30 am USD PPI m/m
8:30 am USD Retail Sales m/m
10:00am USD Prelim UoM Consumer Sentiment
*All times EDT
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.