USD/CAD - Dollar Dragged by Lower Oil Prices

Canadian Dollar (CAD)

After a mini-wobble in the first two days of this week, the Canadian dollar has stabilized a little on global FX markets. The U.S.-Canadian-dollar pair moved steadily higher on both Monday and Tuesday to reach $1.2765 at one point in yesterday’s New York session. The loonie then recovered into the close and overnight has moved 40 points lower to open in North America around $1.2725. Against the British pound, the sterling-Canadian-dollar cross rate rose from a low of $1.6608 on Monday morning all the way up to $1.6791 yesterday and opened this morning around $1.6764.

As well as a few nerves around NAFTA renegotiation which were noted on Tuesday, lower oil prices have undermined some of the support which the Canadian dollar had seen ever since the beginning of the month. NYMEX crude oil began the month at $54.76 U.S. per barrel and rose as high as $57.58 by last Thursday. Subsequently, it has turned sharply lower and though the current price of $55.21 is still around 50 cents up on the month, the positive momentum has been lost and the mood across the whole commodities complex is much more cautious. House price indices and existing homes data released locally this morning are unlikely to offer the loonie much support and its stability against the U.S. dollar masks a fall on many of its major crosses.

US Dollar (USD)

USD/CAD expected range: $1.2670 – $1.2790

The "buy-the-dip" crowd clearly didn’t get the memo Tuesday. Prior to the New York open, futures markets had signaled an opening loss of just three points for the S+P 500 index, but at no point during the New York day did the market manage to claw its way back into positive territory. Indeed, at one point it was more than 16 points lower at 2,566; its lowest point in almost a week. In U.S. economic news, producer prices came in at a much stronger than expected 2.8% y/y; the fastest rate in more than five years with core PPI of 2.4% the highest since February 2002.

The U.S. dollar hasn’t really been trading off rate hike expectations recently – a December hike is still priced at 96.7% probability. Instead, the stock market wobble and continued uncertainty over tax reform have continued to weigh on investor sentiment. The U.S. Dollar Index tumbled more than half a point on Tuesday to 93.48, the lowest since October 26, and in London this morning has been down to a fresh low of just 93.18. Futures markets are signaling another 14 points off the S+P with the DJIA 130 points lower. The next test for stocks and the dollar comes with U.S. Consumer Price Index data this morning where consensus looks for the y/y rate to be unchanged at 1.7%.

Euro (EUR)

CAD/EUR expected range: $0.6610 – $0.6670

The euro may have been glued for a very long time on a $1.16 U.S. "big figure" but it didn’t spend very long at all on $1.17! It took barely 12 hours to trade up to $1.18 and since the European open today, it has added almost half a cent to a best level of $1.1846. The euro pairing with the Canadian dollar, too, has moved sharply higher. On Monday morning in Sydney, the euro would have bought $1.4790 Canadian and today it is up at $1.5078, its highest level since the day of the European Central Bank meeting back on October 26.

Yesterday, investors saw very good Gross Domestic Product figures out of Germany and Italy as well as for the euro-zone as a whole. The comparison with the U.S. tells a clear story: the GDPs of the 19 countries using the euro grew by 0.6% from July-September and were 2.5% higher than the same period in 2016. In the United States, the economy grew just 2.3% y/y in Q3 after also growing slower than the eurozone in Q2. Today brought news of a much bigger than expected eurozone trade surplus of €25.0bn. Although it could be argued that the pace of euro appreciation over the last 24 hours leaves it technically overbought, there’ll be few sellers as long as nervousness persists in U.S. asset markets.

Great British Pound

CAD/GBP expected range: $0.5940 – $0.6015

The British pound has had another choppy overnight session though the absolute magnitude of its moves has been much lower than in recent days. Sterling's pairing with the greenback recovered off yesterday’s London low of $1.3068 to finish in North America around $1.3116 and has been as high as $1.3191 earlier today before selling off 60 basis points to $1.3137. It opens in North America at $1.3170.

The pairing with the Canadian dollar Tuesday rallied from its three-week low of $1.6598 on Monday to end yesterday around 1.6760. This morning, the GBP/CAD rate has traded between $1.6713. and $1.6793 and begins the North American session at $1.6767. Economic data in the U.K. today centred on unemployment and average earnings. The jobless rate was steady at 4.3% though the number of people in employment across the U.K. fell for the first time in nearly a year. There were 32.06 million people working in July-September, which is a 14,000 drop on the previous quarter.

On wages, meantime, both measures (including and excluding bonus payments) were pretty much in line with consensus expectations at 2.2% y/y. A year ago, the Bank of England forecast earnings would grow 3.0% in 2017 and continues to believe there’ll be a strong pickup over the next 18-24 months. Unless and until they do, then with CPI of 3.0%, the squeeze on real incomes and consumer spending in the U.K. looks set to continue for some time to come. The pound will find it difficult to rally unless there’s some unexpected good news on the political or Brexit fronts.

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