The Canadian dollar lost 0.19 percent on Wednesday. The loonie gave back the gains from Tuesday when optimism about USMCA ratification and trade goodwill made the currency an outlier of major pairs. Safe haven currencies were the big draw in the market with the JPY and the CHF rising against the US dollar, while the greenback appreciated against the rest.
The Canadian dollar was off to a good start at the beginning of the North American session gaining on its way to break below 1.3350. The better than expected retail sales data in March sparked a short lived rally as US crude weekly inventories showed a larger than expected buildup. The price of crude plummeted as rising US production, the ongoing US-China trade war and the end of the OPEC+ agreement to cut output weighed on energy prices.
Risk aversion reduced the upside for the loonie, even as fundamentals point to a stronger currency. Wholesale sales in Canada will have to impress after European PMIs are released in the midst of the EU parliamentary elections. European growth has lacked momentum 11 years after the recession. Voters have grown disillusioned with the Union, and the market could witness a rise of eurosceptic parties.
Crude Falls After Surprise US Weekly Crude Buildup
Oil prices dropped by more than 2 percent on Wednesday after the release of the weekly US crude inventory data. A surprise buildup of 4.7 million barrels of crude and 3.7 million barrels of gasoline pushed prices down. Middle East tensions and the ongoing OPEC+ crude output cut deal have kept prices in a higher range, but higher US production keeps putting downward pressure on prices.
Geopolitical, weather and operational factors have reduced crude supply levels. The OPEC+ agreement has been the major factor and with the upcoming June end of the deal there is uncertainty if an extension is coming.
Russia has sent mixed signals and the effectiveness of a production output cut would be limited if it does not rejoin the group. Saudi Arabia has carried a heavy load to soak up excess supply and will steward the group form committing the same mistakes that lead to a free fall in crude prices.
The US is impacting prices in three ways. Sanctions against Iran and Venezuela for political reasons have boosted prices as it reduced supply. US-China trade disputes have a negative effect on global growth forecast reducing energy demand going forward. The final factor has been the rising American output. While sanctions reduce supply and boost prices, lower energy demand and rising production depreciates crude as there is a higher risk of oversupply.
Trade War Concerns Keep Gold Flat as Safe Haven Appeal Rises
Gold rose 0.03 percent on Wednesday. The yellow metal is caught in a tight range as investors are anxious about the US-China trade war. Tariffs from both sides have escalated and China is not backing down to US pressure which could prolong the dispute with no date set for negotiations to reassume. US Secretary Mnuchin has said that there is no plans for him to visit Beijing, although he is looking forward to renewing talks.
Brexit concerns rose as Prime Minister May managed to unite all UK political factions against her. Putting a second referendum on the table did not sit well with Brexiteers, but make it a condition on passing her Brexit proposal was a non-starter for Remain supporters. May’s decision to stick to her proposal could end up being the last straw that leads to her eventual downfall. The task on hand was near impossible from the start. A close Leave victory in the referendum left the historic decision with massive opposition as the perfect deal was never going to be achieved.
Gold had an afternoon revival as the Fed published the minutes from its April/May FOMC meeting. The central stressed patience and affirmed current monetary policy would remain in place for some time. The Fed has already removed all rate hikes from its 2019 calendar as per member forecasts. Rate cut probabilities keep rising, but until there is a clear deterioration of economic fundamentals the Fed will remain on the sidelines.