USD/CAD – Loonie Gains Despite Oil Price Retreat

The USD continues to depreciate a day after U.S. Federal Reserve Chair Yellen deflated any possibility of an April interest rate hike and put in question any moves in the first half of 2015. The Canadian dollar appreciated to a 5 month high despite a drop in the price of oil after inventories continue to grow ahead of the Doha Oil Output Freeze Summit.

Bank of Canada (BoC) Deputy Governor Lynn Patterson said earlier today that the Canadian economy will recover from the drop in oil prices in 2 years. She praised the adaptability of the economy that is shifting away from commodities based.

Private payroll processor ADP released its report on Wednesday and showed a better than expected increase of 200,000 jobs. The news did not boost the USD as the Fed and the market are looking beyond the headline number at signs of inflation. The U.S. non farm payrolls (NFP) due on Friday can afford to miss the forecast of 190,000 but if the real takeaway will be the wage growth component.

The USD depreciated 0.80 versus the CAD in the last 24 hours. The pair is trading at 1.2963 and is expected to continue below 1.30 ahead of the NFP release. The USD was boosted by the optimism of certain Fed members that brought back to life the possibility of an April rate hike, despite the rather dovish March Federal Open Market Committee (FOMC) statement and press conference. The hawkish statements from voting and non voting members got the market to focus on Chair Yellen’s speech on Tuesday. Dr. Yellen stuck to the cautious tone of the FOMC, which forced a dramatic drop in interest rate hike expectations for the rest of the year.

The ADP report is dollar positive, but given the fact that a strong NFP headline is nothing without showing inflationary growth it will be until Friday when the market will act on employment news. Central bank rhetoric has been fanning market expectations but if there is no follow up the market quickly revalues the currency. Yellen brought back expectations to earth after Fed member comments started building unreliable expectations.

Canadian monthly GDP will be released tomorrow with a forecast of 0.3 percent growth in January. Canadian fundamentals have improved since the rapid decline of oil prices at the beginning of the year almost brought about another rate cut. The BoC shifted the focus to the release of the Federal Budget delivered in March. The budget while not as bold as the market expected is a step in the right direction and buys the Canadian central bank time to assess its next move after the effects of the fiscal stimulus package start trickling down.

The week for the CAD will be defined by the outcome of the U.S. NFP report which could push the USD back up against the loonie or sink it further as the Fed remains patient letting other central banks do the heavy lifting.

USD/CAD events to watch this week:

Thursday, March 31
8:30 am CAD GDP m/m
8:30 am USD Unemployment Claims
9:00 pm CNY Manufacturing PMI
9:45 pm CNY Caixin Manufacturing PMI
Friday, Apr 1
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change
8:30 am USD Unemployment Rate
10:00 am USD ISM Manufacturing PMI

*All times EDT