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Canadian Dollar Remains Weak Thanks to Oil Decline, Data Generally Soft

Canadian Dollar Remains Weak Thanks to Oil Decline, Data Generally Soft

2017-03-11 19:00:00
Nick Cawley, Strategist
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Canadian Dollar Remains Weak Thanks to Oil Decline, Data Generally Soft

Fundamental Forecast for USD/CAD: Bullish

- USD/CAD has rallied towards the top of a six-month range but further weakness may lie ahead

- Canadian unemployment data posts significant beat, stabilizing Loonie.

- Fed rate decision, oil inventories on Wednesday likely to drive oil, with repercussions for USD/CAD.

The Canadian dollar has been range bound for the last six-months against the USD and trading within a rough 1.2950 – 1.3550 range since mid-September. And with little economic data of note next week, the upper band may be tested as oil trades lower, US President Donald Trump mulls a new trade agreement, and as a rate hike from the Federal Reserve nears this coming Wednesday.

The latest better-than-expected Canadian unemployment release may have given the Canadian dollar a short-term boost but further challenges lie ahead. Data from Statistics Canada showed Canadian employment increase by +15.3K jobs in February, beating expectations of a -5K fall. The unemployment declined to 6.6% from 6.8%, again beating expectations of an unchanged reading.

The recent fall in Crude Oil, down below $50/barrel and nearly -9% lower on the month, has kept the pressure on an already weak Canadian dollar. Weekly data show US crude oil stocks jumping to 528 million barrels, up 8.2 million barrels in a week and sharply higher than estimates of two million barrels. This inventory build comes despite the recent OPEC agreement to cut output by around 1.8 million barrels per day by mid-2017.

Soft oil prices and the impact on the Canadian energy sector are not the only recent developments troubling the Loonie. US President Donald Trump has said that he will work at “tweaking” the current trade agreement between the two countries. With the US taking over 75% of Canada’s exports, even small trade adjustments - unlikely to be a net-benefit for Canada - will likely hurt the Canadian currency further.

Ahead next week lies another roadblock for the Loonie, with the Federal Reserve expected to hike interest rates by 0.25% at its March 14-15 monetary policy meeting. With expectations of a hike hitting 100% this week, traders are now pricing in a second and third US interest rate hike in 2017, with the more hawkish commentators even talking the potential for four increases this year. A stronger US Dollar and higher interest rates will feed back into weaker oil prices, which will hurt Canada’s trade position, and thus, the Canadian Dollar. Near-term weakness in USD/CAD may be seen as a buying opportunity on a longer-term basis. –NC

--- Written by Nick Cawley, Analyst

To contact Nick, email him at Nicholas.cawley@ig.com

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