USD/CAD – Loonie Gets Shot in Arm from Rising Oil Prices

The Canadian dollar recovered from yesterday’s losses as it was boosted by the rising price of crude. The rumours of a possible cooperation between Russia and the OPEC have appreciated the price of oil even as Saudi Arabia will invest heavily in its production for the foreseeable future. With little economic indicators the USD was on the blackfoot as the recovery in the energy market boosted emerging and commodity markets as risk appetite grew.

The USD/CAD dropped 1.303 percent in the last 24 hours. The turnaround in energy prices depreciated the USD from the session highs of 1.4045 to end of session lows at 1.4085. The price of the currency pair was close to a 2 percent volatility between high and low price movements. West Texas oil as one of the main drivers of the rise of the Loonie had a 4.88 percent price gain and a 10.81 percent volatility from high to low showcasing the volatile trading conditions in the energy market.

Fed Expected to Make a Dovish Turn in First FOMC of 2016

The U.S. Federal Reserve delivered the much-awaited first rate hike to start a tightening monetary policy cycle in December. Weak economic indicators and a struggling global stock market after the Chinese turmoil at the start of the year make the projected 4 rate hikes in 2016 look farfetched. The drop and recovery of oil prices have had a deep impact as commodity currencies outperform one day, only to give gains back the next day as volatility is fuelled by global record production and a lack of cooperation between producers.

The CME FedWatch tool points to a 85.7 percent chance the Fed will keep the rate on hold at 0.50 percent. The Federal Open Market Committee (FOMC) will release its statement on Wednesday, January 20 at 2:00 pm EST. There is no press conference scheduled with the eyes on the market to be focused on any changes on the language of the statement. Given current market conditions language that alludes to volatility and hints about its more dovish stance could be present in the FOMC statement.

Oil Inventories to Impact Loonie

The fate of the Canadian dollar is joined at the hip with the price of oil and minerals. Statistics Canada puts the contribution of oil, gas and mining to upwards of 27% of gross domestic product (GDP). It is also the most volatile component as the price of other goods is not likely to change as much as their valuations are not expected to face the same pricing factors than those anticipated in the oil industry.

The Canadian economy is facing multiple headwinds starting with the emerging market slowdown, which hit commodity prices, and the rate divergence trends that keep the currency under pressure until there are indeed higher rates. The Organization of the Petroleum Exporting Countries (OPEC) unchanged production levels have had far reaching implications for the price of oil. Saudi Arabia is pumping at record levels to keep gaining market share versus competitors. The resulting supply glut has flooded the market and has the price of West Texas oil below $30 in the first weeks of the year.

The loonie must remain low to give a chance of economic recovery via competitive export prices but do so at a moderate pace to avoid triggering inflation beyond the central bank target. How to accomplish that gradual depreciation is something the Bank of Canada and multiple analysts are pondering as the variables keep changing. Tomorrow two of the main factors affecting the loonie will be announced. Oil inventories will give further food for thought for energy traders as the FOMC statement is heavily anticipated to show a dovish Fed that will not raise rates as many times as first thought in 2016.

USD/CAD events to watch this week:

Wednesday, January 27
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Statement
2:00pm USD Federal Funds Rate
3:00pm NZD Official Cash Rate
3:00pm NZD RBNZ Rate Statement
4:45pm NZD Trade Balance
Thursday, January 28
4:30am GBP Prelim GDP q/q
8:30am USD Core Durable Goods Orders m/m
8:30am USD Unemployment Claims
Tentative JPY Monetary Policy Statement
Friday, January 29
12:00am JPY BOJ Outlook Report
Tentative JPY BOJ Press Conference
8:30am CAD GDP m/m
8:30am USD Advance GDP q/q

*All times EST

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