The Canadian dollar traded in a tight range as the market was ready to dig into the minutes from the September Federal Open Market Committee (FOMC) meeting. The loonie ended flat against the greenback as the internal division at the Fed made the September decision to hold rates a close one. Balanced against a higher probability of a rate hike is the turbulence in the Organization of the Petroleum Exporting Countries (OPEC) production curb deal as the group is near 8 year high output.
The notes from the policy meeting in September were highly anticipated as the number of dissenters (3) is higher than the usual unanimous vote. For once the contradictory statements by members to the press was reflected in the minutes. There is a group asking for more immediate action, and not too wait too much longer as it could then force the Fed to play catch up with a faster pace of rate moves. The more moderate section is still not convinced the U.S. economy has enough traction and there is a risk that raising interest rates could further slow down its growth.
The CME FedWatch tool is pointing to an almost 70 percent probability of a rate hike in December as per the Fed Fund futures prices. The November meeting, second to last in the year, has less than 10 percent due to the fact that it has no press conference (even though the Fed in the past has said that they could go at any time) and is too close to the U.S. elections. There are also growing concerns about an erosion of credibility in the market if the Fed does not make a move, even if it is just a token rate hike as expected.
The USD/CAD gained 0.003 percent in the last 24 hours. The pair is trading at 1.3253 after the September FOMC minutes were released. The USD has been gaining versus the CAD as the interest rate gap is forecasted to grow wider at the end of the year. The Bank of Canada (BoC) is not expected to cut rates in 2016, but could be forced to do so if the Fed fails to act.
The Canadian economy has not been able to turn a weaker currency into much of an advantage as non-resource based exports are not enough to offset losses in the commodity sector. Concerns from low rates blowing up a real estate bubble in Vancouver and Toronto has made the government introduce new mortgage rules aimed at slowing down the housing market. The changes will limit the mortgage amounts that Canadians will be able to afford, which in turn could hit other industries as families save more to afford housing.
West Texas lost 0.864 percent in the last 24 hours. The price of WTI is trading at $50.11 ahead of the release of U.S. crude inventories tomorrow at 10:30 am EDT. The black stuff lost some ground on Wednesday as OPEC reported output is at 8 year highs even as the group is getting ready to make a token cut in production. The intention to limit production originally took the market by surprise as the group had failed earlier in the year to freeze the output at record highs. Now with this new information even with a cut, it would be less than a freeze at the Doha summit.
The meeting in Algiers set the stage and promised a big change but OPEC and non-OPEC members have until November 30 to hammer out a deal to announce it as part of the official meeting of the energy group in Vienna. Initial talks during the World Energy Conference in Istanbul have been mixed and both groups will continue to meet to avoid another outcome like in Doha. Given the mercurial nature of the player there is still a chance the deal never materializes, or even if the deal gets signed it could prove too difficult to monitor and audit individual outputs as cooperation from all is needed to stabilize crude prices.
Market events to watch this week:
Thursday, October 13
8:30am USD Unemployment Claims
11:00am USD Crude Oil Inventories
Friday, October 14
8:30am USD Core Retail Sales m/m
8:30am USD PPI m/m
8:30am USD Retail Sales m/m
10:00am USD Prelim UoM Consumer Sentiment