The Canadian dollar depreciated Monday with a flat oil price and little economic data to drive the market. The U.S. dollar rebounded from last week’s losses caused by the concerns surrounding the tax reform. The biggest story in the forex market was the lack of confidence in some sections of the British Conservative Party, putting in jeopardy Prime Minister Theresa May’s tenure. The GBP fell 0.56 percent as the group is eight signatures short of calling a no-confidence vote.
NAFTA talks will reassume on Nov. 17 in Mexico City. The length of the meetings has been extended in an effort to cover more ground ahead of the end of the year. Negotiators have admitted that the original year-end deadline to avoid Mexican presidential elections and U.S. primaries from affecting the talks is not realistic. Concerns about NAFTA not reaching a new agreement are rising and putting pressure on the CAD and MXN currencies.
Inflation data will be the highlight this week with figures from the U.K., U.S. and Canada on the economic calendar. Canadian inflation will be released by Statistics Canada on Friday, Nov. 17 at 8:30 a.m. EST. Forecasts call for a slight gain of 0.1 percent in November.
The USD/CAD gained 0.34 percent on Monday. The currency pair is trading at 1.2728. The loonie was on the back foot since the Asian market open and it continues to give ground until it closed above the 1.27 price level. The issues with the U.S. tax overhaul have not been resolved, but the USD was oversold ahead of the weekend and is now just appreciating as more traders come back into the market after the Memorial Day weekend.
U.S. shares rose in anticipation of more details on the difference between the U.S. House and Senate tax reform proposals. The Canadian dollar has been lifted by the problems of the Trump administration to live up to the promises after the election. The market was expecting tax reform and infrastructure spending earlier in the year. The political capital needed for such an undertaking has been squandered and is now a race against time even with a Republican controlled House and Senate.
The gap between the U.S. and Canadian benchmark rates is expected to remain as the U.S. Federal Reserve delivers its final hike of 2017 in December, while the BoC is probably going to sit out the rest of the year after the central bank assessment has become less optimistic.
The Bank of Canada (BoC) has gone from hiking twice in a short span of time (July and September) to a dovish turn in the last rate statement and other speaking engagements by governor Stephen Poloz. Kenny Fisher MarketPulse Analyst wrote yesterday about the BoC Governor:
After staying on the sidelines in October, the Bank of Canada has left the markets guessing regarding a December rate hike. Last week, BoC Governor Stephen Poloz downplayed concerns about low inflation levels, as the inflation target of 2 percent remains elusive. The BoC will have to keep a close eye on developments south of the border. The Federal Reserve is almost certain to raise rates in December, and if the BoC does not match the hike, the Canadian dollar will likely weaken against the greenback. Another headache for the BoC is the threat from the U.S. administration to pull out of the NAFTA agreement, which is a cornerstone of Canada’s economy. On his Asian trip, U.S. President Donald Trump has reiterated that he favors bilateral trade agreements, rather than multilateral arrangements. If Trump applies this stance to relations with Canada and Mexico, NAFTA could be in trouble, and this could bode badly for the Canadian dollar.
Oil remains near 2-year highs and was trading near $56.64 on Monday. The price of West Texas Intermediate varied throughout the day but settled when the Organization of the Petroleum Exporting Countries (OPEC) raised its energy demand forecasts. The production cut agreement by the organization and other major producers has been a huge factor in the stability of energy prices in the last two years, and with an extension in the works the market has reacted to lower supplies being added.
Oil prices have also risen after the events in Saudi Arabia, where Crown Prince Mohammed bin Salman has put corruption charges against influential princes and tycoons in his effort to reform the Kingdom away from oil revenues.
The Iran/Saudi Arabia conflict is expected to escalate after an attack in Bahrain was attributed to Iran with Saudi facilities enhancing security. Mohammed bin Salman has been a vocal critic of Iran and has already put an economic embargo on Qatar for its ties to Iran.
The rise of oil rigs in the U.S. is keeping the price of energy from getting too high, with two increases in three weeks as the U.S. shale industry recovers from weather-related disruptions and ramps up production. The risk of the OPEC production cut is that the Brazil, Canada and the U.S. can increase their activity as they are not bound by any agreement.
Market events to watch this week:
Tuesday, Nov. 14
4:30 a.m. GBP CPI y/y
8:30 a.m. USD PPI m/m
Wednesday, Nov. 15
4:30 a.m. GBP Average Earnings Index 3m/y
8:30 a.m. USD CPI m/m
8:30 a.m. USD Core CPI m/m
8:30 a.m. USD Core Retail Sales m/m
8:30 a.m. USD Retail Sales m/m
8:30 a.m. 10:30 a.m. USD Crude Oil Inventories
7:30 p.m. AUD Employment Change
Thursday, Nov. 16
4:30 a.m. GBP Retail Sales m/m
8:30 a.m. USD Unemployment Claims
Friday, Nov. 17
8:30 a.m. CAD CPI m/m
8:30 a.m. USD Building Permits
*All times EDT
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