USD/CAD –Oil Plays Havoc With Loonie Value

Currently, investors are not required to follow Canadian fundamentals to hazard a guess at the value of the USD/CAD. The loonie’s value is caught between oil price gains and Fed hike bets.

The commodity and interest rate sensitive currency was within a whisker of closing out the month of August threatening to challenge its 11-year low (CAD$1.3357), before dramatically reversing course and ending up rallying hard against the dollar on Monday ($1.3152) after touching its intraday dollar low of $1.3117 (continues to remain strong USD support).

The CAD’s bullish run had been driven by oil prices continuing their three-day rally of hefty gains. Crude prices managed to advance another +8.8% on Monday trading, and this after climbing +12% last week, the biggest advance since February 2011.

For crude bulls, they found some temporary support from two sources, the EIA and OPEC. Yesterday’s data from the Energy Information Administration (EIA) pointed to lower than expected U.S production, while OPEC, who seems to be concerned by the drop in oil prices trading near multi-year lows, is supposedly ready to talk to other producers.

The possibility of cutting production has certainly spooked the “short” speculators to pare back some of their aggressive positions. Prior to last week, crude prices were down -27% year to date on global growth concerns. The +20% rally over the last four-trading sessions has been extraordinary, nevertheless, global growth worries and over supply glut are expected to continue to weigh heavily on the black stuff.

Already this morning, crude prices are down -3% (WTI $47.61) after data overnight revealed that China’s manufacturing sector contracted at its fastest pace in three-years.

Official manufacturing China PMI fell into contraction for the first time in six-months (49.7), while services PMI slowed to a three-month low (53.4). China worries are again supporting risk aversion trading strategies that favor owning the EUR (€1.1260) and JPY (¥119.86), while offloading commodity sensitive currencies like the CAD ($1.3205) or AUD ($0.7073).

Will Canada Ease Into A Technical Recession?

Today’s Canadian GDP (July +0.2%e vs. -0.2%) and Friday’s labor data (-2.5ke and +6.8%) are unlikely to make a case of changing rate expectations. This should allow the BoC to stay on the sidelines until after the October 19 Federal elections. The BoC’s Governor Poloz would certainly find it rather difficult to preempt the Fed on September 9. If BoC eased and the Fed tightened, rate differentials would become too aggressively wide too soon. Expect Canada’s policy makers to adapt a ‘wait and see’ approach, even if the economy enters a technical recession (two consecutive quarters of contraction).

The Canadian economy contracted -0.2% in May, it’s fifth consecutive month of decline. The BoC has estimated that GDP would decline -0.5% in the Q2, after falling -0.6% in Q1. Governor Poloz is hoping that a softer CAD and lower interest rates (+0.5%) will boost economic activity in the H2.

Market to Focus on NFP

CAD traders will notice Friday’s Canadian jobs report, but they will be focusing on NFP for loonie directional guidance.

In July Canada added +6.6k new jobs, replenishing a similar decline in June. The jobs addition did not alter the unemployment rate, which remained stuck at +6.8%. The majority of the positions added in July were part-time. This time around Canada’s labor market is expected to cut -2.5k jobs while the unemployment rate is forecasted to remain unchanged.

Stateside, another constructive payrolls reading should keep the Fed on track to begin their rate normalization process by end of the year. The timing of the first rate hikes by the Fed in nearly a decade remains a close call (Sep. 14%, Oct. 42% and Dec. 52%).

U.S July payrolls added +215k jobs after a solid +223k in June. The unemployment rate remained steady at a seven-year low of +5.3%. The Fed has upgraded its assessment of the labor market, describing it as continuing to “improve, with solid job gains and declining unemployment. August’s new jobs addition is expected to be +220k while the unemployment rate is forecasted to decline to +5.2%.

It will not be the headline or the unemployment rate that will sway the market on Fed hike timing, but the wage growth component.

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