USD/CAD Loonie Advances in Tandem with Crude Gains

West Texas and Brent Crude Advanced close to 5 Percent Boosting the CAD

The Canadian dollar is benefiting from a high correlation to energy prices as the actions from some members of the Organization of the Petroleum Exporting Countries (OPEC) and Russia appear to have stabilized the price of oil. The surge in oil prices in the past two months have lifted the CAD which is now trading below 1.33 to 1 USD. Global demand for oil is softer and with producers at record levels and in the case of Iran set to double existing production prices fell. The agreement being discussed by major producers Saudi Arabia, Qatar, Venezuela and Russia is not to reduce oil production but rather to freeze the output at current levels. The deal is not finalized yet, but so far the markets have priced in the effort from producers to anchor the price of crude.

The USD lost 0.23 percent versus the CAD in the past 24 hours. The pair has fallen through the 1.33 price level as the price of crude continues to advance. Monetary policy divergence is on hold given that both central banks will not change their rates. The Fed is not expected to hike rates in the short term as conditions have changed since it did so back in December. The Bank of Canada will be awaiting the results from the stimulus package to be announced on March 22, which means it could wait until October to once again make changes to the monetary policy if needed.

The loonie has recovered nearly 10 percent since the USD/CAD touched a high of 1.4602. Strong economic indicators, the rise of oil prices and the growing doubts about a Fed rate hike in the first half of 2016 have boosted the Canadian currency. The central bank decision takes a back seat to the Federal budget as the BoC has little runway left. The market is now focused on the Federal budget, and the central bank could make a move no earlier than October after the effects of the expected stimulus impact the economy.

Economic indicators out of Canada have strengthened the loonie versus the USD. Canadian exports rose for a third consecutive month in January thanks to the weaker currency. The non resource nature of the growth in exports (consumer goods and vehicles) boosted the CAD as it validates the words of the BoC ahead of its rate statement on Wednesday. Canadian Prime Minister Justin Trudeau will start an official visit to the United States that same day in an effort to strengthen the ties between the two nations as the fate of Canada’s economy is deeply linked to its biggest trading partner.

Canadian housing starts and building permits are expected to rise, but some rating agencies have pointed out that the real estate sector is about 20 percent overvalued. Fitch warned that Canadian households are too indebted, much of that in housing, which is why the agency has cut the 2016 growth forecast for Canada from 2 percent down to 1.4 percent.

CAD events to watch this week:

Tuesday, March 8
8:15 am CAD Housing Starts
8:30 am CAD Building Permits m/m
Wednesday, March 9
10:00 am CAD BOC Rate Statement
10:30 am USD Crude Oil Inventories
Thursday, March 10
8:30 am CAD NHPI m/m
8:30 am CAD Capacity Utilization Rate
4:15 pm CAD BOC Gov Poloz Speaks
Friday, March 11
8:30 am CAD Employment Change

*All times EST