USD/CAD: Loonie supported by OPEC deal and strong GDP data
The Organization of the Petroleum Exporting Countries agreed on Wednesday its first oil output reduction since 2008 after de-facto leader Saudi Arabia accepted "a big hit" and dropped a demand that arch-rival Iran also slash output. The deal also included the group's first coordinated action with non-OPEC member Russia in 15 years. On Thursday Azerbaijan said it was also willing to engage in talks on cuts.
OPEC produces a third of global oil, or around 33.6 million bpd, and the deal aims to reduce output by 1.2 million bpd from January 2017, similar to January 2016 levels, when prices fell to over 10-year lows amid ballooning oversupply.
Oil prices, which are strongly correlated to the CAD, rose strongly yesterday. Despite the jump in prices, they are still only at September-October levels - when plans for a cut were first announced - and prices are at less than half their mid-2014 levels, when the global glut started.
Statistics Canada said that Canadian GDP grew 0.9% in the third quarter. Expressed at an annualized rate, real GDP rose 3.5%, topping market expectations of 3.4% and picking up from a contraction in the second quarter. Last quarter brought the strongest pace of expansion since the second quarter of 2014 and exceeded the Bank of Canada's forecast for 3.2% growth.
Growth in household final consumption expenditure was 0.6% qoq, a similar pace to the previous two quarters. Business investment on machinery and equipment fell 3.2% qoq in the third quarter
Exports increased 2.2% qoq, following a 3.9% qoq drop in the previous period. Growth was driven by a 6.1% qoq increase in the energy sector, following a 5.1% qoq decline in the second quarter as a result of the Fort McMurray wildfires.
Investors were encouraged also by September's stronger-than-expected 0.3% GDP growth, which suggested the fourth quarter could slow less than anticipated and give the bank room to keep rates steady. The bank acknowledged in October it had considered cutting again. Policymakers will meet next week and in our opinion a rate cut is unlikely.
Separate data showed that Canadian producer prices rose slightly more than expected in October on higher costs for energy and petroleum products as well as vehicles. The 0.7% increase topped market expectations for a gain of 0.6%. Rising inflationary pressure also reduces likelihood of further monetary easing.
Higher oil prices and lowering likelihood of further monetary easing in Canada should support the CAD. The potential for further appreciation of the USD in the near term is limited, as Fed hike in December along with roughly two rate hikes next year have been already priced in. What is more, expectations for Friday’s U.S. non-farm payrolls are much higher after ADP report handily beat the forecast consensus yesterday. That is why we should expect much stronger reaction in case of a negative surprise in Friday’s jobs report.
We opened USD/CAD short yesterday. Today’s close below 7-day ema (currently at 1.3440) would strengthen the near-term bearish structure. The nearest support level is 23.6% fibo of May-November upward move at 1.3320.
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OPEC produces a third of global oil, or around 33.6 million bpd, and the deal aims to reduce output by 1.2 million bpd from January 2017, similar to January 2016 levels, when prices fell to over 10-year lows amid ballooning oversupply.
Oil prices, which are strongly correlated to the CAD, rose strongly yesterday. Despite the jump in prices, they are still only at September-October levels - when plans for a cut were first announced - and prices are at less than half their mid-2014 levels, when the global glut started.
Statistics Canada said that Canadian GDP grew 0.9% in the third quarter. Expressed at an annualized rate, real GDP rose 3.5%, topping market expectations of 3.4% and picking up from a contraction in the second quarter. Last quarter brought the strongest pace of expansion since the second quarter of 2014 and exceeded the Bank of Canada's forecast for 3.2% growth.
Growth in household final consumption expenditure was 0.6% qoq, a similar pace to the previous two quarters. Business investment on machinery and equipment fell 3.2% qoq in the third quarter
Exports increased 2.2% qoq, following a 3.9% qoq drop in the previous period. Growth was driven by a 6.1% qoq increase in the energy sector, following a 5.1% qoq decline in the second quarter as a result of the Fort McMurray wildfires.
Investors were encouraged also by September's stronger-than-expected 0.3% GDP growth, which suggested the fourth quarter could slow less than anticipated and give the bank room to keep rates steady. The bank acknowledged in October it had considered cutting again. Policymakers will meet next week and in our opinion a rate cut is unlikely.
Separate data showed that Canadian producer prices rose slightly more than expected in October on higher costs for energy and petroleum products as well as vehicles. The 0.7% increase topped market expectations for a gain of 0.6%. Rising inflationary pressure also reduces likelihood of further monetary easing.
Higher oil prices and lowering likelihood of further monetary easing in Canada should support the CAD. The potential for further appreciation of the USD in the near term is limited, as Fed hike in December along with roughly two rate hikes next year have been already priced in. What is more, expectations for Friday’s U.S. non-farm payrolls are much higher after ADP report handily beat the forecast consensus yesterday. That is why we should expect much stronger reaction in case of a negative surprise in Friday’s jobs report.
We opened USD/CAD short yesterday. Today’s close below 7-day ema (currently at 1.3440) would strengthen the near-term bearish structure. The nearest support level is 23.6% fibo of May-November upward move at 1.3320.
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