The market always lives by expectations…
CAD: BOC meeting and oil prices
Information is not investment advice
To trade the Canadian dollar these days, you will need to have the info about the key fundamentals which are driving it: the upcoming Bank of Canada’s meeting (BOC) and the outlook for oil prices.
Bank of Canada will maintain its current policy
The Bank of Canada will meet on Wednesday, July 10. According to the consensus forecast, it will keep the Overnight Rate at 1.75%.
Canadian economic picture is mixed. On the one hand, the Ivey PMI fell in June to the 4-month low of 52.4 from 55.9 in May; the nation’s economy lost 2,200 jobs last month; retail sales growth dramatically slowed down in April from (1.8% to 0.1%).
On the other hand, Canadian GDP growth beat expectations in April (0.3% vs. 0.2%), following a 0.5% increase in March. Wages continued to rise, and the trade balance showed a surplus.
Given the concerns about the global economy, the overall risks are that the situation will develop in a negative way. Yet, for now, Canada is in a better position than many other developed economies and this gives the CAD an edge. Although the expectations of the US Federal Reserve’s rate cuts will diminish after the stronger-than-expected NFP released on Friday, the Fed will still need to support the American economy. As a result, the odds are that USD/CAD will remain in a downtrend.
Notice that the BOC won’t be the only market mover for the pair: the FOMC meeting minutes will be out on July 10, the Fed’s Chair Powell will testify on July 9 and 11.
Oil doesn’t want to give up
The picture for crude oil is more or less favorable and this is a good piece of news for the CAD.
In June, OPEC’s crude oil production fell to the lowest level since April 2014 of 29.60 million bpd. It happened as cartel members Iran and Venezuela are hit by the US sanctions. The Organization of the Petroleum Exporting Countries agreed to extend oil production cuts by nine months, into Q1, 2020. As you probably know, the smaller the supply, the better for the price.
In addition, Middle East tensions represent a powerful engine for oil prices. The latest development was that Iran threatened to capture a British ship after British forces seized an Iranian tanker in Gibraltar over accusations the ship was violating EU sanctions on Syria. The conflict can escalate further.
That doesn’t, of course, mean that oil prices will take off and rocket sky-high. The main obstacle on the way of that is created by the concerns about the global demand. This is a serious factor that will cap oil limiting its recovery. As a result, the oil market can support the CAD, but it’s unlikely to give it strong fuel.
The CAD has decent chances to strengthen versus currencies the JPY, the EUR, the GBP. It may also retain a positive trend versus the USD.
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One of the most attractive bets on the positive outcome of the trade negotiation is selling XAU/USD.