Oil price surge and improving conditions to keep interest rate on hold
The Bank of Canada (BoC) will release its rate statement on Wednesday, December 7 at 10:00 am EST. The central bank is not expected to update its benchmark rate from 0.50 percent. Recovering oil prices thanks to the Organization of the Petroleum Exporting Countries (OPEC) cut agreement and improving Canadian data will help the BoC remain on the sidelines in the last meeting of 2016.
BoC governor Stephen Poloz was proactive in 2015 with two rate cuts ahead of further drops in oil prices that were forecasted to have a negative effect in the Canadian economy. Poloz was right and his decision softened the blow somewhat, but energy prices kept dropping, specially in the start of 2016 as a supply glut threatened to keep the price of crude in free fall. Saudi Arabia and Russia proposed an oil production curb agreement, that went to some failed attempts until finally crystallizing in the latest meeting in Vienna.
The weekly release of U.S. oil inventories will be published at 10:30 am EST giving insight into American crude stocks. CAD traders will be on alert as rhetoric from the Bank of Canada and its comments on the impending Fed interest rate hike later this month will be combined with oil stats ahead of the meeting in Vienna with non-OPEC members on Saturday.
The USD/CAD gained 0.19 percent in the last 24 hours. The pair is trading at $1.3286 after the release of Canadian trade data is showing a lack of competitiveness that is negatively impacting exports. The October trade report showed a narrowing of the deficit that although it did beat estimates from analysts it is still showing signs for concern. Energy prices were the main drivers of the increase in exports, although imports fell by 6.3 percent as the drop in the CAD has made technology investing too expensive for local manufacturers. Neither the Bank of Canada nor the Government have much of a say in the price of global energy and they have so far failed to build a credible alternative to diversify the economy away from natural resources. A rise in global energy demand that could result with the U.S. president elect Trump infrastructure spending and a higher growth of the American economy would be beneficial for the Canadian economy, but only if it manages to remain competitive versus other alternatives in the continent and abroad.
The price of oil lost 1.05 percent today. West Texas is trading at $50.63 after touching daily highs of $51.28. The Organization of the Petroleum Exporting Countries (OPEC) production cut agreement on November 30 boosted oil prices, but questions remains on how deep an impact a reduction will have on record high supply levels. The price of oil was around $45 before the deal was announced and OPEC member announcing record production levels have put pressure on the rise of oil. A meeting with non-OPEC members on Vienna will take place on December 10. So far Mexico and Kazakhstan have confirmed their attendance.
The record levels of production from OPEC members have capped the announcement of a deal in the short term. Questions around how the group will deal with enforcement of the production limits will come up as it will be hard for the producers to change their mindsets away from a market share war, into a more collaborative model. The rise in prices has also benefited U.S. shale producers who were one of the targets of the higher production price shock to drive them out of business. The strategy has been officially put on ice, which means shale in the U.S. is due for a comeback which in turn will put pressure on oil prices as those producers have not signed on to any production cut agreement.
Market events to watch this week:
Wednesday, December 7
4:30am GBP Manufacturing Production m/m
10:00am CAD BOC Rate Statement
10:00am CAD Overnight Rate
10:30am USD Crude Oil Inventories
Thursday, December 8
7:45am EUR Minimum Bid Rate
8:30am EUR ECB Press Conference
8:30am USD Unemployment Claims
Friday, December 9
10:00am USD Prelim UoM Consumer Sentiment