USD/CAD - Falling Oil Prices Undermine Canadian Dollar

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The Canadian dollar has recovered (somewhat) from its end-of-June low but the recovery is shallow, and sentiment is mixed to bearish. Bank of Canada Governor Stephen Poloz delivered a reasonably upbeat outlook for the Canadian economy last week when the quarterly Monetary Policy Report was released.

He said that inflation was on target and the economy was operating close to capacity, justifying the 0.25% rate increase that was announced. He added that the Governing Council believed that higher rates will be needed.

There is no denying that those statements are hawkish. The FX market thought so as well. USD/CAD plunged to $1.3064 from $1.3164 immediately after the rate increase was announced on July 11. But it couldn’t hang on to the gains.

Governor Poloz warned that the uncertainty around the future of the North America Free Trade Agreement (NAFTA) was the biggest risk to his outlook. He said it has caused some companies to delay investment spending or to move their investments to the United States. The imposition of tariffs on steel and aluminum solidified those risks. Those risks are amplified by the US threat to impose tariffs on car imports.

Those concerns have undermined the Canadian dollar. The USD/CAD uptrend from the middle of May is still intact while prices are above $1.3080 with additional support seen at $1.3050 and $1.3010.

The Canadian dollar is also impacted by the 9.8% decline in the price of West Texas Intermediate (WTI) oil since the beginning of July.

Although the Canadian dollar wasn’t getting much benefit from the steep rise in oil prices since June, they did serve to slow losses because of the broad US dollar strength. Now that WTI prices are falling, a degree of Canadian dollar support has been eroded.

The Canadian dollar tracked US dollar gains in early New York trading, this morning. FX traders are looking ahead to Fed chair Jerome Powell’s Congressional testimony this morning. He is expected to reiterate the upbeat U.S. economic outlook he delivered after the Federal Open Market Committee meeting on June 13.

However, the recent string of strong US economic reports suggests the risk is for a more hawkish tone to his comments. The next Federal Open Market Committee meeting is just two weeks away, and although no change in rates is expected, it should all but confirm a September rate hike.

Canada May Manufacturing Shipments data (forecast 0.5% vs April -1.3%) is due today. The April data was weak, in part due to bad weather and the May data is expected to show a sharp rebound. This is third-tier data, but since Governor Poloz watches export activity closely, FX markets react to the report. A weaker-than-expected result would send the Canadian dollar tumbling.

Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians