USD/CAD Loonie Soars as Oil Rebounds

The USD/CAD lost 1.52 percent in the last 24 hours. The recovery of the price of oil boosted the loonie versus the dollar. The move is not considered to be a permanent trend as downside risks remain for both the Canadian currency and crude as oversupply is still a major factor. The European Central Bank (ECB) press conference built up expectations about further easing in March which stabilized stock markets and dissipated anxiety about global growth forecasts. Draghi was dovish and is calling for more action needed, the main point remains if he will get his plan through the ECB council as the group is still divided between austerity and stimulus, which is what probably prompted the diluted QE announcement in December.

The actions of the Bank of Canada stopped the decline of the currency yesterday. More than the rate announcement and the decision to hold the benchmark rate at 0.50 percent it was the words of BoC governor Stephen Poloz during his press conference that gave the market pause in it’s hammering of the CAD. The BoC as well as the market will be waiting for the publication of the Liberal government’s budget in March for the promised fiscal stimulus needed to boost growth. The runway for monetary policy is limited and it was not a surprise that Poloz opted to save a cut for another day.

Bank of Montreal downgraded their Canadian gross domestic product estimates from 1.6 percent to 1 percent following the decline in oil prices. Yesterday the Bank of Canada (BoC) cut their forecast to 1.4 percent for GDP growth in 2016.

The BoC held rates on Wednesday, after a rising number of analysts expected a rate cut due to the rapid decline of oil price and the turmoil in China. The central bank is still expected to cut this year in an effort to boost growth, but easing is off the table until March when the Liberal government announces its first budget that is set to include fiscal stimulus. If the Canadian economy fails to respond to those measures in a timely fashion Governor Poloz is expected to use conventional and unconventional (QE) policies to prop the economy.

USD/CAD Technical

The USD/CAD touched a session low of 1.4228 before settling at just below the 1.43 price level thanks in no small part to the recovery of oil prices. The news of Iranian legal issues with energy exports and attacks in Libya minimized oversupply concerns, but as part of the Davos forum in Switzerland Saudi Arabia promised to keep production levels untouched prompting further weakness ahead for the price of crude.

Tomorrow’s Canadian inflation and retail sales data will bring more details about the state of the economy and if the BoC actions need to be taken sooner rather than later. Retail sales are forecasted to come in at 0.4 percent, while inflation in December will remain at –0.3 percent.

CAD events to watch this week:

Friday, January 22
8:30am CAD Core CPI m/m

*All times EST

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