USD/CAD Oil Market Turmoil Has Loonie Close to 1.40

The USD/CAD managed to trade in a range between 1.38 and barely below 1.40 in the final two weeks of 2015. The uncertainty about the price of oil and the decision by the Federal Reserve to finally hike interest rates have taken their toll on the loonie. The Canadian currency has found no support as the revenues from oil rich Alberta have disappeared and have not been offset by exporting sales. The competitive advantage from a softer currency has not boosted exports enough as most of the manufacturing base was shifted to more price competitive nations in the last decade.

The Canadian economy will have a tough start to the year with the Saudi Arabia and Iran conflict adding volatility to the price of oil, even as the United Kingdom and even the United States pumping crude at record levels and keeping the downward pressure on the price below $40. The U.S. Fed will be in no rush to add another hike to its benchmark interest rate

Canadian Fundamentals Deteriorate in Start of Year

The first week of 2016 will set the pace for the rest of the year. Canadian economic indicators on deck this week will be trade balance and employment data. Manufacturing PMI has already disappointed with a 47.5 reading from the November figures compiled by Canadian bank RBC, the lowest since 2010. The gauge has been below 50 for five months which stresses the lack of options when looking to offset the energy export drop.

Canadian employment will be released at the same time as the U.S. data which has eclipsed the market’s reaction to the 35,000 jobs lost in November. The December data is expected to reverse that trend with a 10,000 jobs gain but again could be ignored if the non-farm payrolls report delivers above or under expectations.

The Bank of Canada is expected to keep the rate unchanged in January awaiting a recovery in the price of oil and more clarity regarding the U.S. Federal Reserve plans for its monetary policy. The release of the historic FOMC December meeting minutes on Wednesday will provide some insights about the inner debates among American policy makers.

Oil Price Under Pressure From Over Supply and Political Turmoil

The execution of a Shiite cleric in Saudi Arabia has driven Iran to enter into a diplomatic conflict with the Kingdom. Sudan and Dubai have backed the Saudi’s and are enforcing diplomatic sanctions given the tone of the rhetoric coming out of Iran. The price of oil has been sensitive to the growing dispute, but the fact that all producers are near record levels, and even the U.S. small producers which were thought to be wiped out with crude below $40 remain in business there is little support for oil at current levels.

The Organization of the Petroleum Exporting Countries (OPEC) maintained its production quota at record levels, but did promise to help stabilize global prices. There have been no hints that this will result in a cut in production. Iran is set to rejoin the elite group of producers as the global sanctions will be lifted and add another source of energy to the growing list. Demand has grown at the same time as supply given the slowdown in emerging market economies, most notably that of China.

The weak PMI this week gives no hope of a quick end to the slowdown and will prove to be a challenging time for energy producers. The CAD as a commodity currency will be dragged down by the underperformance of the price of energy in the case demand does not pickup and absorb all the extra black stuff in the market.

Wednesday, January 6
8:15am USD ADP Non-Farm Employment Change
8:30am CAD Trade Balance
8:30am USD Trade Balance
10:00am USD ISM Non-Manufacturing PMI
2:00pm USD FOMC Meeting Minutes
7:30pm AUD Trade Balance
Thursday, January 7
8:25am CAD BOC Gov Poloz Speaks
8:30am USD Unemployment Claims
7:30pm AUD Retail Sales m/m
Friday, January 8
8:30am USD Non-Farm Employment Change
8:30am USD Unemployment Rate
8:30am CAD Employment Change
8:30pm CNY CPI y/y

*All times EST
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