The Canadian dollar is drowning is a sea of crude. It is unable to gain much traction despite yesterday’s steep U.S. dollar selloff. Traders are focused on falling oil prices and fearing that additional weakness will negatively impact the Canadian economy and force the Bank of Canada to alter their tightening policy.
WTI oil prices have fallen 24% in November and sentiment is bearish. The US produced a record 11.3 million barrels per day of oil in October, while crude stockpiles increased. Yesterday, the Energy Information Administration (EIA) said that crude inventories rose 3.58 million barrels last week. The annual meeting of the Organization of the Petroleum Exporting Countries takes place next Thursday and hopes that the cartel will announce new production cuts are rapidly fading. Saudi Arabia supported reducing output but said it would not cut output by itself. It wants the other OPEC members to share the pain.
Russian President Vladimir Putin did not appear overly concerned about the drop in prices, suggesting Russia may be at odds with the Saudis.
Oil prices are also under pressure because of the U.S./China trade war which threatens to reduce global growth and by default, oil demand. President Trump and China President Xi Jinping are meeting at the G-20 summit on Saturday. Earlier optimism that the two leaders would agree on a way to jump-start trade-talks has faded.
The Canadian dollar enjoyed a brief rally yesterday afternoon after Fed Chair Jerome Powell said that U.S. interest rates were "just below neutral." That was a big deal for markets has it was a complete reversal from is earlier assertion that interest rates were "a long way from neutral." Market participants understood his remarks to mean that the pace of Fed rate hikes in 2019 would be much slower than they expected. The Fed was expected to raise rates three times in 2019, but after Powell’s comments on Wednesday, those expectations have been lowered to just one rate hike.
The U.S. dollar dropped like a rock on the news, and the Canadian dollar climbed 0.9%, The gains were not sustained due to the steep fall in oil prices.
The Canadian dollar resumed its downward slide in Europe overnight, undermined by commodity price weakness, in addition to the oil price drop.
Markets are eagerly awaiting today’s release of the Federal Open Market Committee (FOMC) minutes from the November 8 meeting. They are hoping to discover if Powell’s dovish stance is a misinterpretation or if it reflects the prevailing sentiment on the FOMC. They are likely to be disappointed.
U.S. Personal Consumption Expenditures (PCE) and jobless claims and Canadian Current account data are on tap today. Traders will be keeping an eye on Wall Street price action and biding their time until the weekend G-20 meeting.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
