USD/CAD - Dollar Sentiment Dictated by Oil Prices

Canadian Dollar (CAD)

The Canadian dollar is still tracking oil prices quite closely. Last week, it began against the U.S. dollar around $1.2690, moved to an intra-day high immediately after Friday’s Consumer Price Index of $1.2811 and ended in New York at $1.2770. It opened in London this morning around $1.2783 and has traded in a 40 pip range from $1.2760 to $1.2800. NYMEX crude rallied sharply into the close on Friday, up over $1.50 from Tuesday’s low of $51.55 to end the week, just 25 cents lower at $56.85. This morning in Europe it has slipped around 30 cents to $56.55 with Brent Crude 40 cents lower at $62.18.

The Bank of Canada’s Autumn Review last week contained a very thorough examination of the factors behind the oil price decline since 2014. It concludes, "the most important drivers were the surprising growth of U.S. shale oil production, the output decisions of the Organization of the Petroleum Exporting Countries and the weaker-than-expected global growth that followed the 2009 global financial crisis". For the week ahead, Canadian wholesale sales numbers are out on Tuesday with retail sales published on Thursday when the rest of North America celebrates Thanksgiving. As winter approaches in the Northern Hemisphere, investors are urged tokeep a close eye on those oil prices.

U.S. Dollar (USD)

USD/CAD expected range: $1.2740 – $1.2800

Last week was pretty disappointing for the U.S. dollar and this morning in Asia and European trading it continues to edge a little lower. The recent high for the dollar’s index against a basket of major currencies was way back on November 6 at 94.70. Over the last fortnight it lost almost one-and-a-half points and ended Friday at 93.39; only just off the lows of Wednesday morning. With the euro opening lower today (see below) the U.S. dollar index rose around three-10ths to open in London around 93.66 though it has subsequently given back all its early gains to open unchanged from Friday.

Experts have flagged up over the past few days that the U.S. dollar wasn’t getting much support from the recovery in stocks but there’s an asymmetry developing where it does struggle when stocks fall. With S+P futures indicated around three points lower, this is something which should be watched carefully from here as a close below 93.30 for the U.S dollar Index opens up the technical path to a retest of early September’s 91.00 low.

Of course, the big event of the week ahead will close the market on Thursday’s Thanksgiving holiday, with retailers then praying for a shopping frenzy to rescue their year on Friday. Before then, the minutes of the last Federal Open Minutes Commitee meeting will be released on Wednesday afternoon Washington time. The CME probability calculator shows a 96.7% chance of a 25-basis-point rate hike on December 13 so there’s not much support the U.S. dollar can get from interest rates near-term. It could be a choppy few days in the foreign exchange market…

Euro (EUR)

CAD/EUR expected range: $0.6620 – $0.6670

The euro is little changed from Friday’s close against both the U.S. and Canadian dollars though it has been a very choppy morning as investors tried to assess the implications of a changing German political scene. After a week in which it was one of the winners in the foreign exchange market, the euro pairing with the greenback tumbled from a high just under $1.18 in Sydney to a low of just $1.1726 in London with EUR/CAD at one point down to exactly $1.5000. It has since regained these early losses to open in North America at $1.1785 U.S. and $1.5060 Canadian.

More than two months have passed since the German federal elections in September and Chancellor Angela Merkel’s attempts to create a four-party government failed last night when the pro-business Free Democrats walked out shortly before midnight after repeatedly clashing with the left-wing Greens. A so-called Jamaica coalition (named after the four colours of the Caribbean island’s flag) had never been put together before but the narrowness of the election result meant it was the only way forward without bringing the right-wing AfD party into government.

It appears the major stumbling block between the parties was on immigration, an issue that has overshadowed the past two years of Ms. Merkel’s CDU leadership following her decision to allow over a million asylum seekers into Germany. The way forward from here is far from clear. It is possible that fresh elections will be held in the New Year, but Ms. Merkel may no longer be the head of the CDU at that time. For the moment, German politics will totally overshadow euro-zone economics and it seems premature to expect that France’s President Macron will somehow fill the void which would be left if Angela Merkel departs. Some talk of a CDU minority government has helped the EUR recover early losses but a sustained return above $1.18 U.S. doesn’t look likely unless the greenback heads lower.

Great British Pound

CAD/GBP expected range: $0.5900 – $0.5965

The British Pound had a good week and its’ positive momentum has continued in Monday’s London session with pound reaching intra-day highs of $1.3280 U.S. and $1.6948 Canadian before slipping back a little to open in North America this morning at $1,250 U.S. The European Union’s chief negotiator Michel Barnier has today given an important speech to the Centre for European Reform conference in Brussels. He said there are two contradictory soundbites from the strongest supporters of Brexit: that the U.K. will set itself free from European Union bureaucracy; and that after Brexit the U.K. will still be able to participate in the single market, because the U.K. and the E.U. have shared common rules for 40 years.

This is not a sound basis for going forward: "The U.K. has decided to give up the free movement of people. That means the UK will lose the benefits of the single market. That is a reality". It is against this background that U.K. Chancellor of the Exchequer Philip Hammond delivers the annual Budget on Wednesday. He has the seemingly impossible task of spending considerably more money by borrowing less against a background of a slowing economy. It might really be a question of how exactly he will fail, rather than whether he can actually succeed. Of course, some of these concerns are already 'priced in' to the currency but clients with sterling transactions to execute should be aware of the potential for increased volatility in the second half of this week.

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