The Canadian dollar rose on Wednesday after the Federal Open Market Committee (FOMC) statement kept interest rates unchanged as expected. The biggest highlight of the Fed’s communication was the addition of “relatively soon” to the timing for the start of the central bank’s balance sheet reduction. The September FOMC meeting is seen as a likely candidate to begin trimming the portfolio of assets accumulated during the quantitive easing program.
Weekly US Inventories Fall More than Expected
Oil prices jumped close to 2 percent after the release by the Energy Information Administration (EIA) of the weekly US crude inventories. Oil stocks fell by 7.2 millions barrels, gasoline by 1 million barrels and distillates by 1.9 millions barrels. The larger than expected drawdown pushed oil prices higher as US production is starting to slowdown and the Organization of the Petroleum Exporting Countries (OPEC) and Russia are not backing down in their plans to extend production cuts to reduce the global oil glut.
Fed Remains Optimistic But Concerned About Inflation
The U.S. Federal Reserve tweaked the language on its July FOMC statement from the one published last month regarding inflation. A slight downgrade was evident as the Fed removed the “somewhat” when talking about inflation declining. The other major change was a big signal toward the balance sheet reduction to start in September. Overall there was nothing new for the market and the downgrade on inflation was seen as dovish which is the main reason the USD is on the back foot across the board. Political uncertainty in Washington is not doing the dollar any favors as the healthcare reform debate continues with low probability of a definite outcome.
The USD/CAD lost 0.241 percent in the last 24 hours. The currency is trading at 1.2482 after a dovish FOMC statement was delivered earlier today. The July FOMC meeting did not include a press conference which meant that the document at the end of the meeting was all the central bank would share with the market. The language remained almost unchanged, adding very little to the already known and well telegraphed plans of balance sheet reduction and a potential rate hike later in the year.
The loonie rose against the US dollar as economic indicators in Canada have proven the economy is on a solid path of growth, while the US fundamentals continue to be mixed while also adding the political turmoil surrounding the Trump administration. The Fed has been the biggest supporter of the dollar ever since the market has priced out a Trump bump this year as pro-growth policies promised after the President’s victory are yet to arrive.
The Canadian currency is at a two year high versus the dollar ahead of Friday’s monthly GDP numbers for Canada and the US first estimate of second quarter growth. The loonie rally faces few obstacles unless economic indicators start to soften and the US shakes off the cloud of political uncertainty along with a better than expected GDP.
The price of oil gained 1.838 percent on Wednesday. West Texas Intermediate is trading at $48.54 after the USD retreated following an uneventful Federal Open Market Committee (FOMC) statement published by the U.S. Federal Reserve and a larger than expected drawdown in US weekly crude stocks.
The 7.2 drawdown in weekly inventories was higher than analyst expected with the API report a day earlier also showing a fall of 10.2 million barrels. The comments from US producers about the lack of revenue at current price levels forcing them to cut capital expenses has also driven prices higher as US output is not expected to keep pace against the OPEC led agreement cut in supply.
The price of WTI is near an 8 week high after the OPEC and the other producers who joined the production cut agreement appear to have more stamina than US producers. Risks remain in particular around compliance levels as deeper cuts or even maintaining the current output might be unsustainable for members of the agreement. Already Ecuador and Venezuela have pleaded their case to OPEC. Libya and Nigeria are still exempt from the deal given their latest disruptions caused by geopolitical issues.
Relations within the OPEC are also fragile with Iran and Saudi Arabia on opposite sides of an ideological dispute with other producers taking sides or being forced to like Qatar. Iraq has also hinted that they could increase production but no more details have been shared after the meeting in Russia. Saudi Arabia promised a more stringent compliance regime to assure output limits are enforced.
Market events to watch this week:
Thursday, July 27
8:30 am USD Core Durable Goods Orders m/m
8:30 am USD Unemployment Claims
Friday, July 28
8:30 am CAD GDP m/m
8:30 am USD Advance GDP q/q