The Canadian dollar soared yesterday and held on to those gains overnight. The catalyst was an 8.7% rise in West Texas Intermediate (WTI) oil prices. Canadian dollar demand drove prices through short-term technical resistance levels which triggered additional buying. Holiday thinned markets, and bearish short-term positioning exacerbated the move.
Those holiday-thinned markets are providing a major factor in oil price volatility. A negative oil market outlook at the beginning of the week shifted to a more optimistic view on Thursday. News that the U.S. and China would resume trade talks beginning on Monday combined with a 4.50 million barrel drawdown in U.S. Crude inventories as of December 28 triggered a WTI oil price rally from yesterday’s low of $45.35/barrel to $48.29/b this morning.
Oil prices weren’t the only positive development for Canadian dollar sentiment. The currency was also supported by broad U.S. dollar weakness. President Trump shutdown the U.S. government because he is demanding funding for a Mexican border wall. Democrats are against that policy, and they now control the House. The Democrats passed a spending bill last night that would allow re-opening the government. That bill won’t make through the Republican-controlled Senate, continuing this drama of the absurd. The U.S. dollar was shunned because of this environment.
Federal Reserve Chair Jerome Powell’s recent flip-flop on the U.S. interest rate outlook is another major concern for domestic and global markets. Economists and strategists have downgraded their forecasts for U.S. interest rate hikes in 2019. Instead of three rate increases in 2019, markets are actually pricing a "no-increase" outlook. That sentiment drove U.S. 10-year Treasury yields from 3.239% on November 8 to 2.606% today. The Canadian dollar should have been supported in this environment, but the steep drop in WTI prices triggered domestic growth downgrades and led to speculation that the Bank of Canada could be forced to cut interest rates.
Powell gets another opportunity to clarify his monetary policy outlook today. He is part of a panel discussion that includes former Fed Chairs Janet Yellen and Ben Bernanke that takes place at 10:15 a.m. ET today.
The Fed and the Bank of Canada have said that monetary policy decisions are data-dependent, which suggests that today’s Canadian and U.S. employment reports may be a tad more important than usual. U.S. non-farm payrolls are forecast to rise 177,00 in December which is an improvement over Novembers disappointing 155,000 increase. Thursday’s ADP employment report exceeded expectations, rising 271,000 vs forecast of 178,000. Some traders expect an upward surprise to the data which would help offset this week’s weaker than expected economic reports.
The Canadian jobs report is expected to be soft in part because the November result (at 94,000) was so strong. The U.S. Energy Information Administration weekly Oil Stocks Change report is also due and expected to show a decline of 2.33 million barrels in U.S. crude inventories.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
