USD/CAD Canadian Dollar Lower After Soft Inflation to Lead BoC to Wait on Rates

The USD/CAD gained 0.92 percent during the last five trading days. The currency is trading at 1.2801 despite the price of oil walking back most of the losses this week. A low inflation data point on Friday at 0.1 percent and Bank of Canada (BoC) Deputy Governor Wilkins speaking in NY did not leave the market a clear message that a rate hike is in the cards for the Canadian interest rate this year.

The loonie had a moment on Thursday with petroleum and coal products were behind the lift in Canadian manufacturing sales. The forecast form economists called for a 0.3 percent decline but instead showed a 0.5 gain. The energy industry was the big winner with a 10.3 percent increase in September. The move was short lived as the almost flat inflation reading on Friday after the BoC Deputy Governor already pointed out that it would take more than inflation beating the current target for the central bank to remove eve more stimulus.

This is seen as a sign that the BoC could be expecting higher inflation as the loonie depreciates and oil at stable prices could drive higher wages but with the unknown fate of NAFTA and a housing market awaiting new mortgage rules it would be more prudent for the central bank to wait.

The BoC has already hiked twice in 2017 after a hawkish turn in summer, only to pump the brakes before the end of year. The Canadian interest rate is 1.00 percent, back to its 2015 levels where the BoC cut twice to avoid a deeper impact of the fall in crude prices. The Fed has hike twice and is looking to finish the year with a 25 basis points raise in December.

NAFTA negotiations will weigh in the currency market as Canada export 75 percent of its production to the United States and the threat by President Trump to rip it in half could end up being more than hard negotiating tactics.

Oil prices rebounded on Friday and almost recouped all the losses form earlier in the week. The price of West Texas Intermediate is trading at $56.31 but it did fall below the 55 price level after a surprise buildup of weekly crude inventories in the US. The arrests in Saudi Arabia and the high probability of an extension to the Organization of the Petroleum Exporting Countries (OPEC) production cut boosted oil prices.

On the other hand higher expected production out of the US and lower demand estimates from the International Energy Agency (IEA) combined with the surprise gain reported on Wednesday. Crude shorts took profit ahead of the weekend to avoid more uncertainty as more news could come out of the Middle East on the weekend, which ended up putting WTI within a small distance from the start of the week.

The battle between the rise in production in the US and the cut agreement between OPEC and other major producers will continue. The Russian Energy Minister Alexander Novak spoke yesterday to reassure that Russian producers are committed to the agreement to cut output, but he did not mention if they will go ahead with an extension of said agreement. The OPEC and major producers will meet in Vienna on November 30.

Ecuador has stopped its plans to seek an exemption from the OPEC deal after prices have reacted to the group’s production agreement. The small oil producing nation had also floated the idea of leaving the cartel to be able to pump at levels that would make it easier to balance the country’s budget.

Iraqi and Turkish officials are close to reassuming crude exports form the Kurdish region of Kirkuk. The independence referendum was not recognized by Iraq and backed by Turkey it threatened military action. Oil production form the region has not been able to leave for export but those issues are now being worked out between Turkey and the Iraqi government.

Market events to watch this week:

Monday, November 20
9:00 am EUR ECB President Draghi Speaks
7:30 pm AUD Monetary Policy Meeting Minutes
Tuesday, November 21
4:05 am AUD RBA Gov Lowe Speaks
6:00 pm USD Fed Chair Yellen Speaks
Wednesday, November 22
8:30 am USD Core Durable Goods Orders m/m
8:30 am USD Unemployment Claims
10:30 am USD Crude Oil Inventories
2:00 pm USD FOMC Meeting Minutes
4:45 pm NZD Retail Sales q/q
Thursday, November 23
4:30 am GBP Second Estimate GDP q/q
8:30 am CAD Core Retail Sales m/m
11:30 am CHF SNB Chairman Jordan Speaks

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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