A barrel of Brent crude oil overcame a psychologically important mark, dropping below $ 60. WTI crude oil also could not resist above $ 50. Today, the price has decreased to $ 49.8 per barrel. The last time the oil market was at these levels over a year ago, in October 2017. True, then the price crossed this line as part of the upward movement, recovering from the level of the annual minimum ($ 45 per barrel). Therefore, it is incorrect to compare the current situation with the events of the past year.
However, last fall, the Canadian dollar gave up its position in the same way. “Loonie” was under strong pressure due to NAFTA’s uncertain prospects and persistent doubts about the rate of the interest rate increase. Let me remind you that the Bank of Canada began to tighten its policy in July 2017, having raised the rate twice last year and three times this year. But each time the market suspected the regulator that it would pause for the tightening of monetary policy.
As a rule, there were compelling reasons for such suspicions. For example, negotiations on the renegotiation of the Agreement on the North American Free Trade Zone (NAFTA) lasted more than two years against the backdrop of regular threats from Trump to strengthen trade barriers between countries. Uncertainty in this matter was reflected in the determination of the members of the Canadian Central Bank, and in the country’s investment climate. For example, in October last year, a pair of USD / CAD jumped by almost a thousand points, after the NAFTA deal once again fell through.
Now, this question is already irrelevant. NAFTA has transformed into the USMCA, after which traders have lost interest in this topic (by the way, the official signing of the new contract is expected on the G20). But this does not mean that doubts about the further actions of the Bank of Canada have disappeared, only the fundamental factors affecting the determination of the members of the Canadian regulator have changed. Thus, the focus of the market has shifted to the dynamics of key indicators of the Canadian economy and the behavior of the oil market.
The main macroeconomic data recently show a positive trend. So, the unemployment rate again dropped to 5.8% (after a temporary jump to 6%), and the inflation rate was even better than expected. And although for two months (in August and September), the consumer price index on a monthly basis was in a negative area, in October the indicator showed an unexpected increase of 0.3%. In annual terms, a positive trend was also recorded, up to 2.4%. Core inflation also increased significantly, up to 0.4% m / m and 1.5% y / y.
Such dynamics make it possible to count on tightening the rhetoric on the part of representatives of the regulator, especially since the Bank of Canada, raising the rate in October, hinted at further steps in this direction. According to Stephen Poloz, despite a fivefold increase, the interest rate is still below the “neutral range” (2.5% -3.5%). Given the fact that at the moment, the rate is at the level of 1.75%, traders have every reason to rely on a strict policy of the regulator. Especially since the first signs of inflationary pressure appeared in October.
Despite this fundamental disposition, the Canadian dollar paired with a greenback feels obviously insecure. In November, USD / CAD finally entrenched itself in the area of 30 figures, showing bullish sentiment. What are missing bears? The answer lies on the surface, oil. It is worth noting here that the annual prices for petroleum products rose by 12% in October. This suggests that the dynamics of “black gold” has a strong influence on the overall inflationary dynamics. Therefore, the trend of recent weeks can not but cause concern among those traders who are counting on a further increase in the interest rate by the Canadian regulator.
The oil market is declining for many reasons, among which the main ones should be highlighted. First of all, this is an oversupply of production, and secondly, it is fairly reasonable to doubt that the December summit of OPEC + will end in an agreement to restrict production in 2019. In particular, yesterday oil quotes went down again after the publication of the Energy Information Administration data on the growth of commercial oil reserves in the US by 3.6 million barrels (whereas the forecast was at +0.3 million barrels).
The correlation between the Canadian dollar and oil quotes takes all the other fundamental factors into the background. Even the current release of the Core PCE Price Index (the level of Americans’ spending on personal consumption) had only a temporary impact on the pair, although the release was worse than expected, both in annual and monthly terms. After a temporary pullback to the low of the day, a pair of USD / CAD resumed its growth, following the oil market.
This suggests that tomorrow’s release of data on Canadian GDP growth should also be treated with extreme caution. If the indicator comes out better than the predicted values (although most analysts expect a decline in annual terms), the southern USD / CAD impulse may be false/temporary. The downward dynamics of the oil market will be a priority for the Loonie, as further collapse may affect the determination of the members of the Canadian regulator.
In terms of technology, the pair may well soon reach the level of 1.3330, where there is a strong resistance level in the form of the upper line of the Bollinger Bands indicator on the daily chart. In addition, the upward trend of USD / CAD is confirmed by the “Line Parade” signal of the Ichimoku Kinko Hyo indicator and the price being found between the middle and upper lines of the Bollinger Bands indicator. From the level of 1.3330, we can consider selling the Loonie with a shortstop, based on the current fundamental picture for the oil market and the US dollar.
The material has been provided by InstaForex Company – www.instaforex.com