Loonie Awaiting U.S. Employment Data

The Canadian economy expanded in January by 0.6 percent doubling economists expectations. This is the strongest monthly GDP figure since the price of oil was above $100 in July 2013. The Canadian dollar has been riding a positive trend against the USD after the March Federal Open Market Committee (FOMC) disappointed with a dovish tone.

The loonie depreciated on profit taking and end of the month flows with traders also eyeing the release of the U.S. employment report on Friday.

USD/CAD Chart

The USD/CAD advanced 0.18 percent in the last 24 hours. The loonie is losing momentum ahead of the release of the NFP report tomorrow at 8:30 EDT. The pair is trading at 1.2987 after touching a session low of 1.2858 in the morning.

Bank of Canada (BoC) Deputy Governor Lynn Patterson said yesterday that the Canadian economy will recover from the drop in oil prices in 2 years. She praised the adaptability of the economy that is shifting away from commodities based. The rise in the GDP validates her views and that of the BoC Governor Stephen Poloz. The goal of diversifying away from natural resources seemed unreasonable 2 years ago, but now with oil prices stable, but still below $40 and growing uncertainty about the Doha Summit it remains the only viable course for the Canadian economy.

The Canadian central bank has held rates unchanged in the first two monetary policy meetings this year. The strategy to wait for the release of the Federal Budget has passed it first phase. The budget did not impress, but so far it has ticked all the boxes. The central bank will be forced to step back in on behalf of the economy, but the government has bought it much needed time. The results of the fiscal stimulus won’t show up until later this year, and then the BoC will decide what course of action to take with a limited interest rate runway. The BoC has mentioned that it could also use unconventional methods, hinting perhaps at a negative interest rate. Canada opted to use fiscal measures first as it also worries that low rates have created a housing and credit bubble.

The Canadian employment data will be released next week, leaving the CAD with little arguments versus the USD as the NFP report is published. The Fed has once again sent mixed messages that confused the market. The March FOMC meeting resulted in a dovish statement with lower economic projections. The following week Fed members hinted at an April rate hike which reversed the downward trend the U.S. dollar was caught on. Chair Yellen again deflated that with her speech in New York. The market is having a hard time deciding what to focus on. Fed facts or Fed speak?

WTI Oil Chart

Is US crude in trouble? The commodity has posted losses over six straight days, and has dropped 8 percent since mid-March, when crude was trading above $42. Oil prices remain under pressure due to a huge oversupply, and the weekly EIA Inventory report of US crude has shown only one decline in 2016. Oil producers will meet in Qatar next month to discuss capping output, but it’s questionable if this meeting will be any more successful than previous attempts which led nowhere. Many OPEC nations have announced that they will not be attending, and crude output from OPEC rose in March.

The U.S. non farm payrolls (NFP) report will be published on Friday, April 1 at 8:30 am EDT. The U.S. is expected to have added more than 200,000 new jobs keeping the unemployment rate steady at 4.9 percent. The focus of investors will quickly turn to the wage growth. The Fed during its FOMC statement and two Chair Janet Yellen speeches has stuck to a dovish outlook for the U.S. economy that need a stronger boost than the headline jobs number can provide. Inflation expectations are low and one area where a strong NFP in the wage growth component could make a difference for future rate hike estimates.

USD/CAD events to watch this week:

Friday, Apr 1
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change
8:30 am USD Unemployment Rate
10:00 am USD ISM Manufacturing PMI

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