The Canadian dollar continued to rally versus the US dollar after the release of the gross domestic product (GDP) earlier today showed a monthly gain of 0.2 percent in line with expectations. The USD/CAD lost 0.29 percent in the last 24 hours as the loonie advanced against its US counterpart after the positive GDP and Bank of Canada (BoC) business survey validate the hawkish rhetoric launched two weeks ago that has put a rate hike firmly on the table. Senior monetary policy members have said that the rate cuts from 2015 have done their job and the central bank could be ready to remove some stimulus. The market was taken by surprise by the change of tune, and is now pricing in a 70 percent chance of an interest rate hike in July.
The USD is having the worst quarter since 2010 despite the hawkish rhetoric from the U.S. Federal Reserve. Political uncertainty in the White House and a divisive healthcare reform delayed to after the Fourth of July Senate recess have put downward pressure on the dollar. The Fed does not have a monopoly on optimism as other central bank have joined the chorus as economic growth has improved in Canada, the United Kingdom and Europe. Central bankers are pointing to an end of stimulus, but with little details or actions as of yet. The Fed remains the most proactive central bank with four 25 basis points rate hikes (two this year) and the end of its quantitative easing program. the next step is the reduction of its massive balance sheet which could happen before the end of the year.
The Bank of Canada is a special case as the European Central Bank (ECB) and the Bank of England (BoE) have quantitive easing programs that will have to be gradually wound down whereas Stephen Poloz can jump on the rate hike bandwagon with relative speed. The BoC governor also does not have to worry about a vote as there is no monetary policy committee.
The timing of the first rate hike will be challenging. The three factors driving the loonie will have to be taken into consideration. Oil prices have been stable but the showdown between the US shale producers and the OPEC output deal nations is not addressing the tepid demand for energy around the world. Nafta renegotiations starting in August could change the economic landscape for Canada and that is something the central bank will have to address. The third factor is the Fed itself. The American economy has been softer in 2017 raising questions about what impact a third rate hike and a lower Fed balance sheet could have in the second half of the year.
The USD/CAD lost 0.379 in the last 24 hours. The currency pair is trading at 1.2966 as economic indicators and hawkish rhetoric has boosted the loonie while the political uncertainty in the US has impacted the US dollar. The pair has decisively broken through the 1.30 price level and the loonie rally will keep going as the market heads into next week’s US employment data on a short trading week due to the Fourth of July holiday.
The Fed will release the notes from its latest Federal Open Market Committee (FOMC). The US central bank hiked rates by 25 basis points as expected but with inflation remaining low and some obvious dissenters like Minnesota’s Fed Kashkari it will be insightful to learn what form the debate took shape as it helps forecasters model the upcoming decisions from the central bank regarding rates and the reduction of the balance sheet which seems to be a more agreeable subject amongst policy makers.
Canadian economic output rose in April by 0.2 percent as expected. On a yearly basis the economy is growing at a 3.3 percent rate, the biggest gain since 2014. Services are leading the way with an improvement in commodities and a slowdown in manufacturing the major highlights. Next week CAD traders will be tracking the release of the Canadian Trade Balance on Thursday, July 6 at 8:30 am EDT and the employment report on Friday, July 7 at 8:30 am EDT for guidance on the path of the loonie.
Oil gained 0.372 on Friday. The price of West Texas Intermediate is trading at $45.11 amid some financial institutions are buying at what they think is the bottom. Citibank is calling for a rebound of crude after two weeks were oil inventories have been subdued. There has not been any evidence of improvement in demand and the tug of war between the Organization of the Petroleum Exporting Countries (OPEC) and the US shale producers will continue to keep the black stuff trading in a range as data supports one side over the other.
Goldman Sachs was less bullish and issued a note reducing the oil prices forecast for next quarter after Nigeria and Libya productions ended their disruptions and continue to be exempt from the OPEC oil cut agreement. GS is pointing to a $47.50 price per barrel of WTI, which was a significant downgrade from the previous $55 price level.
Crude has advanced 6.2 percent in the last week as the downward pressure due to the oversupply concerns has eased. OPEC members will meet with other producers in Russia to discuss the next steps to stabilize energy prices after they have already agreed to extend the crude production cut until March of 2018. Maintenance and disruptions due to a storm in the Gulf of Mexico reduced the level of US inventories and gave oil a chance to record its best rally of the year and yet prices will be net negative in June. The start of the driving season in the US has not been too favourable for crude addressing the biggest issue yet to be tackled by producers, the apparent lack of demand worldwide.
Market events to watch this week:o
Sunday, July 2
- 9:45 pm CNY Caixin Manufacturing PMI
Monday, July 3
- 4:30 am GBP Manufacturing PMI
- 10:00 am USD ISM Manufacturing PMI
- 9:30 pm AUD Retail Sales m/m
Tuesday, July 4
- 12:30 am AUD RBA Rate Statement
- 4:30 am GBP Construction PMI
- Tentative GBP Inflation Report Hearings
Wednesday, July 5
- 4:30 am GBP Services PMI
- 2:00 pm USD FOMC Meeting Minutes
- 9:30 pm AUD Trade Balance
Thursday, July 6
- 8:15 am USD ADP Non-Farm Employment Change
- 8:30 am CAD Trade Balance
- 8:30 am USD Unemployment Claims
- 10:00 am USD ISM Non-Manufacturing PMI
- 11:30 am USD Crude Oil Inventories
Friday, July 7
- 4:30 am GBP Manufacturing Production m/m
- 8:30 am CAD Employment Change
- 8:30 am CAD Unemployment Rate
- 8:30 am USD Average Hourly Earnings m/m
- 8:30 am USD Non-Farm Employment Change
*All times EDT
