The Canadian dollar fell slightly on Monday after the optimism surrounding the U.S. tax reform has wavered as concerns about the debt load sapped the USD of momentum. The loonie was boosted on Friday by a massive Canadian jobs report for November. The economy added 79,500 jobs and the unemployment rate fell to 5.9 percent. Gross domestic product (GDP) also come in above forecast, but less impressive at a 0.2 percent monthly gain. The surprise increase in employment took the CAD from deep in the red to ending the week ahead of the USD despite the U.S. Senate tax bill chances of passing being high.
The GDP validated the slowdown of the economy in the third quarter, but with strong employment data the Canadian economy could make an improvement sooner rather than later. The Bank of Canada (BoC) hiked interest rates twice in 2017 back to the 1.00 percent level. Governor Stephen Poloz had cut twice in 2015 to avoid a deeper negative impact of falling oil prices. The actions of the Organization of the Petroleum Exporting Countries (OPEC) and other major producers to band together in agreement to cut production has stabilized oil prices. The weaker Canadian dollar also helped boost exports and attracted investment jolting the economy to a surprise GDP gain of 4.5 percent, the best pace in six years. The third quarter report in contrast shows a gain of 1.7 percent in annual terms.
The loonie posted a five-week high after the strong jobs and improved third quarter GDP. Some of the gains were taken back by the rise in the USD after the weekend’s vote on the Senate tax bill. A Reuters survey of 103 economists revealed that three U.S. interest rate hikes are expected in 2018. The poll also showed that the December rate hike has a high probability and will come in at 25 basis points, the third rate hike of 2017. The rest of the week will be dominated by U.S. jobs data (ADP and NFP reports) and the Bank of Canada rate statement on Wednesday.
The USD/CAD lost 0.7 percent on Monday. The currency pair is trading at 1.2675 after the loonie retraced after the U.S. Senate passed its version of the tax bill over the weekend. Geopolitics continue to keep the USD in check as the Trump Administration is fielding multiple investigations into their presidential campaign and a crowdsourced effort by citizens threatens to derail the promised tax reforms. Since both the House and the Senate passed their own versions they now need to be merged into a cohesive bill in order to pass.
The Bank of Canada is not expected to modify its benchmark rate on Wednesday, Dec. 6, at 10 a.m. EST. The overnight rate is 1.00 after the last 25-basis-points hike in September and given the slowdown of economic growth economists do not foresee a hike until next year. U.S. interest rate moves are highly anticipated with the December decision near 100 percent probability but already priced into the dollar. The Reuters poll keeps a hawkish forecast on the Fed that will get a new Chair in February as Fed Chair Janet Yellen steps down.
Canadian Prime Minister Justin Trudeau is in China with the intention to build a plan B on trade in case NAFTA ends up disappearing. While not exactly a perfect replacement, a deal with China could diversify Canada’s reliance on its neighbour to the south, but given the long negotiation periods for this type of deals it could be a decade before it is signed. The meeting between Trudeau and Chinese Premier Li Keqiang was positive with China showing an open attitude.
Energy prices started the week on a down note. The price of West Texas Intermediate is trading at $57.34. Crude prices have been trading in a tight range at the start of the week with all the spotlight on the U.S. ahead of the release of employment data. Dollar strength has hurt commodities and for some investors was a signal for profit taking. The announcement of the 9-month extension of the production cut agreement between Organization of the Petroleum Exporting Countries and other major producers took WTI to near $58.60 per barrel. Oil prices will be awaiting Tuesday’s afternoon API’s stock data and the official Energy Information Administration weekly crude inventories released on Wednesday at 10:30 a.m. EST.
Market events to watch this week:
Tuesday, Dec. 5
4:30 a.m. GBP Services PMI
8:30 a.m. CAD Trade Balance
10:00 a.m. USD ISM Non-Manufacturing PMI
7:30 p.m. AUD GDP q/q
Wednesday, Dec. 6
8:15 a.m. USD ADP Non-Farm Employment Change
10:00 a.m. CAD BOC Rate Statement
10:00 a.m. CAD Overnight Rate
10:30 a.m. USD Crude Oil Inventories
7:30 p.m. AUD Trade Balance
Thursday, Dec. 7
8:30 a.m. USD Unemployment Claims
11:00 a.m. EUR ECB President Draghi Speaks
Friday, Dec. 8
4:30 a.m. GBP Manufacturing Production m/m
8:30 a.m. USD Average Hourly Earnings m/m
8:30 a.m. USD Non-Farm Employment Change
8:30 a.m. USD Unemployment Rate
*All times EDT
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