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Canadian Dollar Still Looks To Crude For Direction Despite Rising Yield Expectations

Canadian Dollar Still Looks To Crude For Direction Despite Rising Yield Expectations

2010-07-09 17:41:00
John Rivera, Currency Analyst
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USD/CAD

The Canadian dollar is in the midst of a four day rally as the commodity dollar gained over 400 pips against the greenback. A stronger than expected employment report for June sent the “loonie’ higher across the board ahead of the U.S. session. The Canadian economy added 93,200 jobs smashing forecasts of 20,000 which could start to raise the outlook for interest rates. Despite today’s reaction to fundamental data, yield expectations have had little influence on direction with them only explaining 8% of volatility, as the BoC has given greater weight to broader trends in determining monetary policy. Meanwhile, crude prices remain the dominant driver of price action holding a negative 63% correlation.

PD-10-07-09-01

BoC Interest Rate Expectations

The Bank of Canada was the first of the G-7 to raise rates at their last policy meeting and June’s strong labor report is raising the outlook for additional tightening at their July 20th meeting. Overnight index swaps are now pricing in a 105 bps worth of tightening over the next year which could lead to continued “loonie” support. However, BoC Governor Carney’s recent statements showed that policy makers would increase the level of importance given to global factors in determining monetary direction. Therefore, we could see the central bank remains gun shy with the European Bank stress tests on the horizon. A rate hold could sink the commodity dollar as markets price out the expected rise in interest rates. Discuss this and trading ideas join the USD/CAD forum.

PD-10-07-09-02

FOMC Interest Rate Expectations

An unexpected decline in U.S. initial jobless claims ended a string of disappointing employment data and re-established some hope that eh labor market is gathering strength. It isn’t surprising that we saw interest rate expectations tick higher as the FOMC has maintained that rates will remain low until evidence of job growth emerges. Nevertheless, markets are only giving a 13.8% chance of a ret hike by December signaling that a rate hike may not come until early 2011.

PD-10-07-09-03

Oil

Oil is struggling to remain in positive territory after rallying for consecutive days as global growth concerns have started to fade. The European debt crisis had seen markets start to price in another doomsday scenario but with global fundamentals continuing to show resiliency, crude has started to regain its footing on a brighter outlook for demand. Indeed, we can see that oil prices are carving out an ascending channel which would put resistance above $80 bbl. However, there is the potential that a broader triangle formation is in play, leading to a period of consolidation before an ultimate breakout. Discuss this and other fundamental data in the Economics Forum.

PD-10-07-09-04

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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