The Canadian dollar collapsed Tuesday under the weight of barrels of oil. West Texas Intermediate (WTI) the North American benchmark for crude oil prices dropped over 7.0% on Tuesday. Prices were under pressure from fears that in 2019, the world’s oil supply will far outpace demand. The United States has surpassed Russia and is the world’s largest oil producer, thanks to Shale. They are not part of the Organization of the Petroleum Exporting Countries, and it is illegal for American companies to "fix" prices to stifle competition. OPEC has no such restrictions and exists to manipulate crude prices. A lot of these concerns would disappear if China and the U.S. came to terms on a new trade agreement. The two nations plan formal trade talks in January.
The free-falling oil prices side-swiped the Canadian dollar which was already under pressure thanks to the recent dovish flip by the Bank of Canada. Governor Stephen Poloz warned markets that the drop in crude prices was material and would have a negative impact on domestic growth. And that was before yesterday’s WTI plunge. The Canadian dollar dropped below key technical support levels which suggests even further losses in the coming weeks.
It could still get a reprieve. The Federal Open Market Committee (FOMC) releases a policy statement and a new Summary of Projections this afternoon, followed by a press conference with Chair Jerome Powell. Recent statements from Powell gave rise to speculation that the Fed was backing off from their somewhat hawkish stance. They were expected to raise interest rates three to four times in 2019.
However, tweaks to the November statement and Powell's statement that rates were just below the "neutral rate" had analysts scrambling to revise their forecasts. President Trump has been launching twitter bombs at the Fed and Powell, urging them to reconsider their hawkish interest rate policies. Trump’s comments and the recent plunge in U.S. equity markets support arguments for the Fed to shift to a dovish stance. If so, equity markets would rally, risk aversion fears would dissipate, and together they would lift the Canadian dollar.
The Canadian dollar is suffering from other "Made-in-Canada" issues. The domestic economy is slowing. Recent economic reports have been negative Last week, capacity utilization, Household debt to income, building permits and New Housing Price data were below expectations. Yesterday Manufacturing Shipments were -0.1%, well below the 0.4% forecast.
Today traders will be focused on inflation. Canada November Consumer Price Index is expected to rise 1.8% y/y well below the 2.4% level seen in October. If so, inflation will be back below the BoC’s target rate of 2.0%. Analysts are blaming the November drop in oil prices for the inflation slump.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
