The loonie has been caught in a tight range ahead of the Federal Open Market Committee (FOMC) meeting this week. The Federal Reserve has investors uncertain on the outcome of the September rate setting meeting. According to the CME’s FedWatch tool that is 30-Day Fed Fund futures prices the probability of a rate hike this week is 25 percent. The loonie has been on the defensive this week as there is little economic data out of Canada until Friday’s inflation release and by then the FOMC would have passed.
The Bank of Canada held rates as the proactive pair of interest rate cuts earlier in the year have been working as exports have risen thanks to a weaker currency. The hesitation from the Fed has given the market room to speculate about further rate cuts from the BoC if the American central bank stands pat until next year.
Oil Offers Support to CAD But For How Long?
The price of oil has recovered from the downward trend triggered by record production facing a shrinking demand. Recently lower inventories have given a boost to the price of crude but the black stuff is still reeling from Goldman Sachs (NYSE:GS) comments of the likelihood of West Texas oil touching $20. GS analysis is based on the market share strategy from OPEC that has not eased on production even as the price continues to drop.
Fed Can Afford to Wait as Headwinds Threaten Global Economy
September’s FOMC remains the best chance for the Fed to start a tightening cycle without triggering too much volatility in the market. Volatility is inevitable, even as this much-awaited event comes to pass. A disappointing first quarter in 2015 destroyed the June FOMC chances of being the chosen one to start raising rates. In hindsight given how those GDP numbers were revised and the economy bounced back, it would have made more sense to do it back then. The Fed will probably be thinking that too, and trying to avoid it if possible, which is why September remains on the table and will do so, until the rate announcement either validates or scratches it out of contention.
A Canadian election brings uncertainty to the CAD, but for now investors are more focused on the Fed hoping Chair Janet Yellen will give some straight answers at the press conference following the American interest rate announcement and updated economic projections on Thursday at 2:00 pm EDT.