Canadian Dollar Pressured As Crude Falls For Fourth Day

USD/CAD

The Canadian economy grew 0.4% in November following a 0.2% rise the month prior led by a 2.4% improvement in wholesale trade. A stronger than expected Canadian labor market-forecasted to have added 15,000 jobs in December- is helping to fuel consumer demand. If domestic growth accelerates it could push price above the Bank of Canada’s 2% threshold, forcing them to raise rates sooner than their current mid-year target. Meanwhile, Canadian interest rate expectations have had little influence on the USD/CAD’s direction as the central bank has taken every opportunity to re-commit to keeping rates on hold until the second half of the year. Therefore, oil prices continue to be the main driver of price action for the pair with a 46% correlation. Falling crude price has sent dollar/cad to its highest level since mid December, just before OPEC opted to keep production levels on hold.

BoC Interest Rate Expectations

Overnight Index Swaps are pricing in 65 bps of tightening over the next twelve months which most likely translate into two quarter point hikes near the end of the year. The Fed appears to be on hold until November and given Canada’s the dependence on the U.S. the BoC may follow suit. Regardless, the upcoming labor report could fuel expectations for inflation and raise the outlook for yields. Additionally, the Canadian central bank has been known to surprise markets, so a rate hike before June can’t be ruled out. To discuss this and trading ideas join the USD/CAD forum.

FOMC Interest Rate Expectations

Fed funds futures are pricing a zero percent chance of a rate hike in March, which is why I am taking a longer-term focus As we can see from the table below, markets are only pricing in a 32.2% chance that tightening will begin in August. Economists have now set their sights on November for tightening to begin. A 5.7% rise in fourth quarter GDP may see the horizon shorten, but the breakdown of the report showed consumer remain reluctant to spend with personal consumption falling to 2.0% from 2.8% and durable goods slipping 0.9% following a 20.4% jump the quarter prior.

Oil

Oil is lower for the fourth straight day despite the robust U.S. GDP figures as concerns over the sustainability of growth absent government stimulus continue to weigh. A 2.23 million barrel drop in U.S. crude inventories also failed to lend support as consumption is expected decline. Looking at a daily chart there appears to be additional downside risks as oil has yet to test rising trend line support. Therefore, we could see the current Canadian dollar bearish trend continue. 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