The Canadian dollar’s fortunes are tied to oil prices, and oil prices are rising. West Texas Intermediate (WTI) surged overnight, for a gain of 4.9% this week. Prices have edged down from the peak, but they remain supported. The International Energy Agency’s (IEA) Monthly Oil Report, released this morning, paints a reasonably positive outlook for crude. The IEA suggests that there is a floor under oil prices supported by the production cuts by the Organization of the Petroleum Countries and Russia, and by Saudi Arabia’s recent claim that it would make significant cuts in January. The IEA said their estimate for global oil demand growth was unchanged at 1.4 million barrels/day. They also predicted that the U.S. crude production would surpass the production capacity for Russia and Saudi Arabia.
The Canadian dollar is also supported by the mildly positive tone towards risk because of a Wall Street Journal article. The WSJ claims that U.S. Treasury Secretary Steven Mnuchin is proposing easing or even eliminating tariffs on Chinese imports as a way of calming financial markets and encouraging China to make longer-term reforms. The Treasury department denied the story. Still, stock markets rose across the globe. The major Asia indices closed with strong gains, European bourses are all higher by at least 1.25%, and the U.S. futures suggest that the Dow Jones Industrial Average will surge, at the open.
The Canadian dollar managed to squeak out a small gain compared to Monday’s Toronto opening level. Only the British pound performed better, and that was all to do with UK domestic issues. Nevertheless, sterling is casting a shadow over the FX market. British Members of Parliament soundly rejected Prime Minister Theresa May's Brexit deal that was negotiated with the European Union. She managed to win a no-confidence vote the next day. GBP/USD rallied on the news as many believe that the risk of a "no-deal" Brexit diminished with May’s defeat. Nevertheless, the Canadian dollar was undermined by GBP/CAD demand although, firmer oil prices limited the damage.
Canada December inflation data is on tap today. The drop in gasoline prices from falling oil prices is being blamed for what is expected to be a 0.4% drop in headline CPI. Bank of Canada Governor Stephen Poloz warned of this result last week, and the policy statement said that the drop in crude prices would weigh on inflation for most of this year.
The U.S. government shutdown has delayed the release of many key economic reports that are produced by the Census Bureau and the Bureau of Economic Analysis. However, data is available from non-government sources. Today, the Michigan Consumer Sentiment Index, Capacity Utilization and Industrial Production are due. The U.S. will be closed on Monday for Martin Luther King Day.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
