The Canadian dollar rose again on Thursday on the back of a soft U.S. dollar following the decision by the American central bank to leave rates unchanged in September. Earlier on Wednesday the U.S. crude inventories had reported a drawdown of 6.2 million barrels versus a forecast of a 3.2 million barrels buildup.
The U.S. Federal Reserve’s Federal Open Market Committee (FOMC) meeting, statement and press conference by Fed Chair Janet Yellen took once again the spotlight in the markets. As anticipated by investors there was no change to the rate, with a cautious Fed publishing lower growth projections but overall staying optimistic about the U.S. economy.
The biggest change from other FOMC statements was the rise in the number of dissenters. Three FOMC members voted against keeping the rates on hold. Loretta J. Mester, Eric Rosengren and Esther George voted for a rate hike. This marks a two year high of dissenting members and unlike last year where Yellen managed an unanimous rate hike in December this time it might not be such an easy task as the Fed is divided from within.
The Organization for Economic Co-operation and Development cut the growth forecast for the Canadian economy to 2.9 percent down from 3.0 percent in June. The reasons cited should not be a surprise to CAD traders as it is the same ones the Bank of Canada (BoC) keeps referring as its biggest risks.
The high levels of household debt and rising house prices in Toronto and Vancouver fuelled by low rates could end in a sudden correction. The Paris based think tank is suggesting the Canadian government apply regional controls to keep prices from overheating further.
The USD/CAD lost 0.674 percent in the last 24 hours. The pair is trading at 1.3064 and quickly broke through the 1.32 and 1.31 price levels after the Fed announced their decision to hold rates and push the timing of an impending rate hike further down towards the end of the year once again.
The Canadian dollar also got a boost from oil prices who recovered ahead of the meeting of OPEC members in Algiers. The surprise drawdown in U.S. inventories and the high likelihood of an oil output freeze at the OPEC meeting in Algiers helped crude prices bounce after the Fed held rates in September.
The Fed managed to kick the can until the end of the year although the market was always expecting the U.S. central bank to opt for the safest route and keep the U.S. election cycle undisturbed by a rate hike.
The price of West Texas oil gained 2.066 percent in the last 24 hours. Crude is trading at $45.66 as Iran and Saudi Arabia continue their meeting in Vienna ahead of the all important Organization of the Petroleum Exporting Countries (OPEC) summit in Algiers that is heavily anticipated to feature an agreement between major producers to freeze oil output.
There have been lots of comments cooling down the impact of the announcement as even the Secretary General of the OPEC mentioned it would only last a year. Today the Russian Minister of Energy said that production cuts have not been discussed which means the freeze will happen at record highs.
With little change to demand as the global economy slows down the agreement will only put a floor on how low the price of crude can fall, but it will have a hard time convincing the market that the black stuff is undervalued.
The CAD will wrap up the week with the release of inflation and retail sales data. Core inflation has been at zero for the past three months and is expected to show a slight improvement to 0.2 percent.
Core retail sales suffered a setback last month with a 0.8 contraction and this time around the forecast is calling for a 0.5 percent gain. Positive economic indicators could boost the CAD to finish the week strong against the USD before a week with few economic indicators coming up.
Market events to watch this week:
Thursday, September 22
8:30am USD Unemployment Claims
9:00am EUR ECB President Draghi Speaks
Friday, September 23
8:30am CAD Core CPI m/m
8:30am CAD Core Retail Sales m/m