The Canadian dollar was once again following closely the price moves of crude. Oil bounced more than one percent after several reports of Iran participating in the Organization of the Petroleum Exporting Countries (OPEC) meeting in September. One of the main topics of discussion will be the option to freeze crude output at current levels. Iran could not commit to freezing output in March as it was just ramping back its production levels after the end of Western sanctions. Now it appears the OPEC’s third largest producers appears to be signalling a willingness to discuss a strategy to bump the price of energy.
Canadian bank earnings are in the spotlight after being solid investments after the credit crisis but are now facing rising challenges as household debt is at record high levels as low rates are driving some cities to a surge in house prices. The Bank of Canada (BoC) and the Canadian government have warned consumers and banks about the risks of a sudden drop in house prices as debt levels keep rising. Bank loan portfolios are also under the microscope as their energy sector exposure has grown riskier following the drop in oil prices.
The USD/CAD lost 0.344 percent in the last 24 hours. The pair is trading at 1.2909 with the main driver of the CAD being the surge in the price of oil. Canadian fundamentals have been softer, but with a weaker USD as the possibility of a U.S. Federal Reserve rate hike in September erodes and the price of oil has been boosted by OPEC rhetoric the loonie has managed to stay below the 1.30 price level.
Uncertainty about the next move of the U.S. Federal Reserve regarding rates has depreciated the USD. The Jackson Hole symposium that kicks off on Friday and a much awaited speech by Fed Chair Janet Yellen could bring some clarity on the central bank’s next move. Conflicting comments from Fed members have markets heavily discounting the possibility of a rate hike this year. The September and December Federal Open Market Committee (FOMC) meetings are possibilities with the CME FedWatch tool pointing to a 24 percent probability of a move in September (up from 15 percent yesterday) and a higher than 52 percent probability of a rate hike in December.
West Texas oil gained 1.52 percent in the last 24 hours. The price of crude is trading at $47.45 ahead of the release of U.S. crude inventories thanks to the rising speculation that Iran will take part in the Algiers meeting in September. The last oil output freeze failed when Saudi Arabia demanded an all or nothing participation and Iran could not comply. Now with enough time to ramp up production to pre-sanction levels Iran appears to be ready to enter into output negotiations. The division between OPEC members is not new and the biggest proponents of group action are the producers whose national budget depends heavily on oil profits that have been hit by plummeting oil prices.
The rumours about Iran have not been confirmed by officials and as the market shifts its focus on inventories it could be for naught as the forecast calls for a slight drawdown after the surprise 2.5 million negative move in crude stocks last week. Current prices have boosted producers around the world to keep pumping which could again put downward pressure on prices. The oil output freeze although a powerful argument with clear impact on prices could prove ineffective if producers freeze at record high levels.
Market events to watch this week:
Wednesday, August 24
10:30am USD Crude Oil Inventories
Thursday, August 25
4:00am EUR German Ifo Business Climate
8:30am USD Core Durable Goods Orders m/m
8:30am USD Unemployment Claims
Friday, August 26
4:30am GBP Second Estimate GDP q/q
8:30am USD Prelim GDP q/q
ALL DAY Jackson Hole Economic Policy Symposium
*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar
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Alfonso Esparza
trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
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