USD/CAD Loonie Rises as Bank of Canada Holds and Oil Prices Move After US Inventories

The Canadian dollar had an eventful trading session today. The two main factors that would guide the CAD were: the Bank of Canada (BoC) statement at 10:00 am EDT and the release of the U.S. oil inventories at 10:30 am EDT.

The BoC as expected did not change its benchmark interest rate from 0.50 percent. Also anticipated was the addition of comments around the not fully quantified Alberta wild fires impact on the economy. The central bank was optimistic in saying the economy would bounce back in the third quarter of the year, with the first one coming inline with previous forecasts. The second quarter is being forecasted as a contraction as the economy remains too dependant on natural resources.

The statement from the BoC makes it clear that a change in monetary policy is not forthcoming this year. At least until things change dramatically from the central bank’s forecast with both a journey into negative rates and a rate hike on the table depending on the performance of the Canadian economy. The risks from record low interest rates for longer continue to rise as household debt rises but the government and the central bank remain vigilant.

The USD/CAD depreciated 0.77 percent in the last 24 hours. The pair is trading at 1.3043 on a volatile day after the Canadian central bank and the U.S. oil inventory data hit the wires. The loonie benefited initially from the BoC statement that kept rates intact and quickly broke through the 1.31 price level, but was pulled back after the release of the crude inventories that showed a fall of 4.2 million barrels due to disruptions in North America. The loonie continues above 1.30 due to the rate divergence with the U.S. that got new life after the release of the April Federal Open Market Committee (FOMC) minutes and the rising price of oil boosted by supply disruptions despite Organization of the Petroleum Exporting Countries (OPEC) members hitting record high production numbers.

The only surprise on the Bank of Canada’s statement was the lack of mention of the soft export data. The weaker currency was supposed to lift exports as the economy tried to shift away from natural resources and into services and manufacturing. Services have rebounded, but manufacturing continues to stagnate and has not repaired the damage the parity loonie had on the sector.

The loonie continues to appreciate versus the USD on the back of the price of oil and the positive outlook by the Canadian central bank despite weaker economic data at the end the first quarter and the expectation of the same for the second quarter. Although not backing down from their goal of diversifying the Canadian economy away from natural resources it seems getting the oil sands back in line and forecasted higher oil prices will be behind any rebound in the third quarter. If the scenario unfold like the BoC expects, there will be no need for a rate cut this year, and will line up with economists who view a rate hike next year as the most likely next move from policy makers.

CAD events to watch this week:

Thursday, May 26
8:30am USD Core Durable Goods Orders m/m
8:30am USD Unemployment Claims
Friday, May 27
8:30am USD Prelim GDP q/q

*All times EDT