Canadian Dollar Battles Headwinds Ahead of Inflation Release

Talking Points:

• Oil is underpinning the Loonie but US shale supply looms.
• Friday’s inflation data will steer the central bank’s monetary policy for the rest of the year.
• The October USD/CAD high may come back into play.

Fundamental Forecast for CAD: Neutral

We remain neutral on the Canadian Dollar but would look closely at buying USD/CAD if oil prices start to turn lower or if Friday’s inflation release disappoints to the downside. In addition, negative news surrounding the ongoing NAFTA renegotiations with the US would also weigh heavily on CAD and prompt opening a short CAD position.

The Loonie has been dragged higher lately by a resurgent oil complex with US Crude hitting a 28-month high around $58/brl earlier this week on ongoing tensions in the Middle East. However a higher crude price has bought US shale producers back to the party with the latest EIA data showing US crude production hitting an all-time high of 9.62 million barrels of oil a day in the week through November 3.

And the potential downturn in the price of oil may not be the only headwind facing the Canadian Dollar with the upcoming inflation release – Friday November 17 – likely to show consumer prices falling short of the central bank’s target of 2%. Last month inflation rose to 1.6% from 1.4% on the back of higher gasoline prices, however excluding gas prices inflation was a more lowly 1.1%, according to Statistics Canada.

The low level of inflation is also likely to stay the central banks’ hand and keep Canadian interest rates unchanged from their current level for the rest of the year. A weaker CAD would help the central bank by importing inflation and driving consumer prices higher in an economy where wage inflation remains elusive.

A look at the daily USD/CAD chart shows the pairs’ first target is the 23.6% Fibonacci retracement level at 1.27136 ahead of a larger move to the late October high of 1.29150.

Chart: USD/CAD Daily Timeframe (April 25 – November 10, 2017)

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--- Written by Nick Cawley, Analyst

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

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