USD/CAD Surges On Falling Oil Prices, Major Crude Support Level Could Slow Gains
The Canadian dollar has fallen victim to the European debt crisis as the commodity driven currency has sharply fallen throughout the week. The austerity measures demanded of Greece as part of an aid package reminded markets that several governments will need to rein in spending in order to get their budget deficits under control following extreme levels of spending to save their economies from the deep recession brought in by the credit crisis. The dimming growth outlook has led to a sharp fall in oil prices which has been a dragging force on the “loonie” and a supporting factor for the USD/CAD as the pair has seen its negative correlation with crude strengthening to 70%. A slowing global economy translates into diminished demand for raw materials which has been the main driver of growth for the Canadian economy. Thus, we have seen the outlook for tightening from the BoC sink which could start to become a weighing factor on the com-dollar despite the positive relationship that we are seeing in our table.
BoC Interest Rate Expectations
Overnight Index Swaps for the BoC don’t trade as often as their counter parts so we must take correlation relationships with a grain of salt. Therefore, we must discount the positive correlation that we are seeing as we can see that that yield expectations have sharply fallen in the past few days which will take time to be reflected in a 50-Day correlation. Markets are now only expecting 92 bps in tightening over the next year down from 170 bps on May 6th. The upcoming release of the Canadian CPI report could reverse the recent drop in yield expectations if price growth increases above the central bank’s 2.0% target. Forecasts are for consumer prices to rise to 1.7% from 1.4% which may not be enough to offset the broader growth concerns. Discuss this and trading ideas join the USD/CAD forum.
FOMC Interest Rate Expectations
Fed fund futures continue to reflect the dovish comments from the FOMC which continues to point toward rates remaining low for an “extended period.” Today’s fundamental data supported policy maker’s outlook for a slow recovery as jobless claims rose by 25,000 and the leading indicator gauge had its first negative reading since March,2009. Markets are only pricing in a 27.4% chance of a rate hike by November and unless we see a significant improvement in the labor markets the central bank could remain on hold until 2011.
Oil prices have been in a freefall since the European debt crisis heightened as the outlook for global growth continues to dim. Major corrections like we have seen over the past few weeks are often susceptible to retracements which we could see happen following a failed test of major support. Crude is threatening the 38.2% Fibo of the 32.40-87.15 advance which is potentially a major inflection point. A break below there exposes $60 and could translate into additional “loonie” losses. Discuss this and other fundamental data in the Economics Forum.
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