USD/CAD Loonie Caught between OPEC-Russia Deal and Oil Supply Glut

The Canadian dollar had a net positive day on Thursday with oil prices again dictating the fate of the loonie. Talks of cooperation between theOrganization of the Petroleum Exporting Countries (OPEC) and Russia are making crude end up north of $30 even as Iran is working away at legal and logistical issues to reincorporate to global production.

The Federal Open Market Committee (FOMC) announcement yesterday to maintain the benchmark rate unchanged between 0.25 and 0.50 percent came as no surprise as macro conditions had changed since the Fed historically raised rates in December. The volatile first weeks of 2016 have put into question the projected 4 interest rates. The fact that this is also an election year was also going to limit the ability of the Fed to intervene during the more delicate period leading up to the presidential election.

The USC/CAD lost 0.32 percent, but it had a wide trading range of 1.43 percent as both the OPEC and Russia did not give any details about their talks or their potential production targets. OPEC members have posted record production years, the same as Russia and other non-OPEC members like the United States. The technological innovation brought about by shale drilling has created a supply glut as a result as OPEC has tried to maintain market share via higher production levels at the expense of prices.

Canadian monthly gross domestic product (GDP) will be published tomorrow at 8:30 am EST. Strong retail sales in November have boosted the forecast up to 0.3 percent, but it would not be a big shock if the GDP numbers over perform on Friday. Some of the positive effects of the lower currency can already be felt as exports have risen. It might not be enough to offset the overall drop in oil prices, but as Canada pushes to diversify its economy some of those efforts will be rewarded.

The Canadian Raw Materials Price Index (RMPI) will also be released with an expected decline of 4 percent. The fall in commodities have reduced prices of raw materials and has dampened inflation expectations.

The U.S. gross domestic product (GDP) will be released at the same time as the Canadian counterpart. Unlike Canadian data which is monthly the U.S. will release the advance fourth quarter data. This is the first release (there are two more after) and therefore is the one that sets the expectations on what is to follow. The U.S. economy is expected to have expanded by 0.8 percent. Not the pace the Fed was probably forecasting to base their monetary policy. For the time being the Fed appears to be content with a moderate pace of growth, considering the turmoil in the global economy.

The GDP divergence will be interesting to watch between the U.S. and Canada that gives an edge to the loonie, but the market will be more focused on the U.S. growth as it could derail the plans of the Fed in the coming months.

CAD events to watch this week:

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