Canadian Dollar Support Limited As Crude Trends Lower

USD/CAD

The Canadian dollar has spent the past two days giving back its post Dubai scare gains as the brief return of risk appetite has started to wane. The commodity dollar has been relatively supported despite oil trending lower and the BoC committed to keeping rates on hold until mid 2010. Nevertheless, crude prices are still accounting for 69% of volatility for the USD/CAD and must be taken into consideration when trading the pair. The small divergence could be a sign of future weakness for the “loonie” especially if risk trends maintain their current direction.

BoC Interest Rate Expectations

The Bank of Canada has been consistent with their commitment to keep rates on hold until mid 2010 which has sent interest rate expectations plummeting. Overnight index swaps are now pricing in 48 bps of rate hikes over the next twelve months compared with 112 bps on October 14th. Tomorrow’s employment and manufacturing data may not do much to change that sentiment but they should garner attention due to their longer term implications. The Canadian economy is expected to have generated 15,000 jobs with the unemployment rate to hold steady at 8.6% following a surprising job loss of 43,200 in October. A surge in new hires could raise expectations for future wages and in turn inflation which could accelerate the central banks’ time table for tightening. The Ivey PMI gauge will also cross the wires and early forecasts are for a activity to have slipped to 60.0 from 61.2 but expand for the sixth straight month in November. To discuss this and trading ideas join the USD/CAD forum.

FOMC Interest Rate Expectations

U.S. interest expectations have flat lined with markets only pricing in only a 8.9% chance of a rate hike by March. It isn’t until September that we see a rate hike as the most likely possibility according to Fed Fund futures. November’s labor report scheduled for release on Friday holds the largest potential to alter policy maker’s direction. Non-Farm payroll jobs are expected to have decline by 125,000 which would be the lowest since March, 2008 and a print close to even could raise expectation for job growth and in turn tightening from the FOMC. Regardless, the main catalyst for a rate hike from the central bank will be inflation, which remains off in the distance with prices still declining.

Oil

Oil has traded in a downward trending channel since it spiked to a high of $82 bbl on October 12th. Prices above $80 are generally considered extremely detrimental to growth. Considering the fragile state of the global economy prices above the level are difficult to justify and may see little support. Therefore, the path of least resistance for crude may be lower which could signal weakness ahead for the “loonie”.  A string U.S. labor report could raise the outlook for future demand and be a supporting factor over the near-term but without job growth the bullish sentiment generated may fall short of testing the yearly high.  To discuss this and other fundamental data join the Economics Forum.

To discuss this report or be added to the email list contact John Rivera, Currency Analyst: jrivera@fxcm.com