The Canadian dollar is trading higher on Friday after a volatile week that did not start so well for the currency. The USD started the week with little traction after a Jackson Hole summit did not produce a strong endorsement from Fed Chair Janet Yellen. Her comments on the importance of regulation could be read as her version of putting herself out of the running for the leadership of the US central bank. A higher than expected GDP estimate for the US took the USD to its highest level against the loonie, with a strong ADP private payroll setting expectations of a strong NFP at the end of the week.
The Canadian dollar started the comeback with a massive gain in the second quarter. Annual growth at the end of Q2 was 4.5 percent beating expectations and raising the probability of another rate hike this year. The Bank of Canada (BoC) cut rates twice in 2015 and could bring the benchmark rate back to 1 percent after a 25 basis point hike in July.
The Bank of Canada (BoC) will be running ahead of the pack in September when it delivers its rate statement on Wednesday, September 6 at 10:00 am EDT. The fact that Stephen Poloz and his team won’t know what other central banks, in particular the European Central Bank (ECB) and the U.S. Federal Reserve have planned for this month makes October the most likely choice of delivering another monetary policy action. The week in Canadian data will end with employment data due on Friday, September 8 at 8:30 am EDT.
The USD/CAD fell 0.712 percent in the last five days. The currency pair is trading at 1.2384 near weekly lows. The Canadian dollar took advantage of the ills that affect the USD and combined with strong economic indicators appreciated during the week.
The Canadian economy surprised to the upside with a 4.5 percent annual GDP growth in the second quarter being expectations of a 3.7 percent increase. This makes Canada the best performing country in the G7 and has put a rate hike before the end of the year firmly on the table. The Bank of Canada (BoC) is set to deliver its rate statement on September 6, which could be too early with market analyst favouring the October monetary policy meeting which could give the central bank enough time to see what its American and European counterparts will be launching in September. Bond markets are pricing in a 37.8 percent probability of a rate hike in September, up from yesterday’s 20.9 percent. The October rate hike has a 86.8 percent chance according to fixed income prices.
The Bank of Canada (BoC) will release its rate statement on Wednesday, September 6 at 10:00 am EDT. The better than expected second quarter GDP has increased the probability of a rate hike in September, but the majority of analysts still view October as a more likely scenario. The Canadian benchmark rate sits at 0.75 percent and still 25 basis points below where the rate was in early 2015 before the BoC made two proactive rate cuts.
US Oil prices dropped 1.054 percent this week. The price of West Texas Intermediate is trading at $47.04 after the impact of Hurricane Harvey has caused a glut of crude oil, while limiting the capacity to refine it into gasoline making the price of the distillate soar. The Department of Energy has released 4.5 million barrels of the US strategic reserve destined to be refined in Louisiana to try to keep prices stable until refineries in Texas can reopen.
US oil interests are also under threat as the NAFTA trade talks take place in Mexico City. The treaty has allowed US producers to sell refined products back to Canada and Mexico, but could end up being caught in a tariff war if Trump decides to walk off the negotiating table.
Market events to watch this week:
Monday, September 4
4:30 am GBP Construction PMI
Tuesday, September 5
12:30 am AUD Cash Rate
12:30 am AUD RBA Rate Statement
4:30 am GBP Services PMI
9:30 pm AUD GDP q/q
Wednesday, September 6
8:30 am CAD Trade Balance
10:00 am CAD BOC Rate Statement
10:00 am CAD Overnight Rate
10:00 am USD ISM Non-Manufacturing PMI
9:30 pm AUD Retail Sales m/m
9:30 pm AUD Trade Balance
Thursday, September 7
7:45 am EUR Minimum Bid Rate
8:30 am EUR ECB Press Conference
8:30 am USD Unemployment Claims
11:00 am USD Crude Oil Inventories
Tentative CNY Trade Balance
Friday, September 8
4:30 am GBP Manufacturing Production m/m
8:30 am CAD Employment Change
*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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