USD/CAD is trading well above the 1.40 level, even though oil prices haven’t hit new lows. There are many factors hitting the loonie. Here are some explanations:
Here is their view, courtesy of eFXnews:
The Canadian dollar fell to new 12-year-plus lows below C$1.4000 versus the U.S. dollar Tuesday, with the loonie weighed by weak oil prices and expected widening in Canadian versus U.S. interest rate differentials.
The Canadian dollar’s fate going forward will be closely linked to oil prices, as always, as well as the health of the domestic and global economy, analysts said.
Dollar-Canada was trading at C$1.3993 Tuesday afternoon, on the high side of a C$1.3898 to C$1.4019 range.
Earlier, the pair vaulted the 2015 highs near C$1.4001, seen December 18, and then proceeded to also take out the August 29, 2003 highs around C$1.4014 before stalling.
The next level to watch is the Aug 28, 2003 highs near C$1.4085. Larger resistance is seen at the Aug 22, 2003 highs near C$1.4167 and the July 23, 2003 highs near C$1.4189
George Davis, chief technical analyst at RBC Capital Markets, said “support at C$1.3803 and C$1.3675 is expected to attract buying interest in this context, with the 2015 high at C1.3996 and the 2004 high at C$1.4001 serving as a key resistance zone to watch.”
“A daily close above C$1.4001 would add to bullish sentiment, exposing C$1.4059 followed by the July 2003 high at C$1.4188 thereafter,” with additional resistance seen at C$1.4321.
In terms of monetary policy, the Bank of Canada does not meet until January 20, but BOC Governor Stephen Poloz is scheduled to speak Thursday in Ottawa at 8:25 a.m. ET.
His speech, with a topic of “Life After Liftoff: Divergence and U.S. Monetary Policy” will be available on the website at 8:10 am ET.
“The theme of divergence is clearly evident in the performance of the Canadian dollar of late (at -15.6% against the green back in the past twelve months, it is proving the weakest of the G10 currencies) and in bond markets, with Canada/US spreads in the belly of the curve re-visiting historical lows to open 2016,” noted Mark Chandler, head of Canadian FIC strategy and Simon Deeley, fixed income strategists at RBC Capital Markets.
With Canadian data increasingly more spotty in recent weeks, Chandler and Deely planned to watch to see if Governor Poloz “maintains his contention in December (and after recently soft statistics) that the economy is unfolding about as expected in the October MPR.”
“The Governor should have some of the results of the Bank’s Business Outlook Survey (BOS) in hand, which will be released formally next Monday and it will be interesting to see whether it provides some comfort (which should also be the theme from U.S. policy normalization if it reflects a belief that the U.S. expansion is on track),” they said.
Commodity price weakness has been a clear driver behind the weakness in the Canadian economy.
“Looking at the details by industry, we find that about 75% of the moderation in growth since December 2014 can be attributed to the adjustment to lower commodity prices and to the reduction in business investment,” said Charles St. Arnaud, economist at FX strategist at Nomura.
Business investment will likely remain weak in 2016 and be “a drag on growth given the further decline in commodity prices in recent months, continued uncertainty regarding the global economy and the increase in the cost of capital goods coming from the sharp CAD depreciation,” he said.
Economic sluggishness and fiscal uncertainty has increased the likelihood of a BOC rate cut, St. Arnaud said.
“Moreover, after almost two months in power, the announcement of the size and details of the fiscal stimulus by the new federal government are still being awaited and one could start to wonder if the economy can wait the months it will need for the impact to be felt,” he said.
“The longer the announcement of fiscal stimulus is delayed, the more likely the BOC will cut rates to provide a buffer, even though fiscal policy would be much more effective at stimulating the economy than monetary policy,” St. Arnaud said.
While Nomura’s forecast is that Canadian rates will likely remain unchanged in 2016, they put “the probability of a rate cut in the first half of 2016 at around 40%,” he added.
Friday morning, both U.S. non-farm payroll data, with MNI’s median of 205,000, and Canadian jobs data, with Bloomberg’s estimate of +10,000, for December will be released. The U.S. unemployment rate is seen unchanged at 5.0%, with Canada’s jobless rate unchanged at 7.1%.
“Canadian jobs tend to be volatile as seen by last month’s print of -35.7 which was the lowest since 2009,” said Kiranpal Singh, analyst at CitiFX.
A solid reading on the Canadian jobs front “would unquestionably” take some stress off of the loonie, he said.
On Thursday’s speech, CitiFX looked for Governor Poloz “to reiterate the weakness in the Canadian economy with Q4 growth being softer than Q3, which is in line with BoC expectations.”
“Last year the BOC surprised the market by cutting rates in January; as the BOC reconvenes on January 20th, Poloz’s speech should be monitored for any indication,” Singh said.
What ever happens on Canada’s economic front will depend on the trajectory of oil prices, which show no sign of firming, despite market expectations for a rebound in the second half of 2016.
NYMEX February light sweet crude oil futures were trading down $0.50 at $36.26 per barrel Tuesday, on the low side of a $36.05 to $37.10 range.
Last year, West Texas Intermediate traded in a range of $33.98, seen December 21 to $62.68, seen May 6.
The front contract topped out at $38.39 Monday, the highest level seen since Dec. 9, driven by escalating Middle East tensions, but settled at $36.76.
Now today, WTI has taken out the Dec. 31 low at $36.22 which points to further downside.
“Petroleum markets are seeing renewed selling, with disappointment over the limited upside reaction to the tensions between Saudi Arabia and Iran reinforcing the dominant bearish sentiment,” said Tim Evans, energy futures specialist at Citi Futures and OTC Clearing.
Dollar strength is being attributed to oil market weakness, although FX traders will argue the contrary, i.e. that lower oil prices are behind the US dollar strength,” he said.
“One way or another, it’s a feedback loop that contributes to the weakness in oil,” Evans said.
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