The Canadian dollar appreciated on Wednesday boosted by US dollar weakness. Oil prices rose to a 2 year high with drawdowns in weekly inventories. The US dollar fell after durable goods orders disappointed with a 1.2 percent fall, although the core reading met expectations at 0.4 percent gain.
The main event in the US before the Thanksgiving holiday was the publication of the Federal Open Market Committee (FOMC) minutes from the November meeting. The market is already pricing in a rate hike in December, but further evidence of the internal debates regarding US inflation were expected. The minutes did not disappoint as there seems to be a strong contingent of Fed voting members who are concerned with weak inflation. That anxiety is not likely going to affect the coming rate hike, but will dampen the pace of rate hikes in 2018.
The NAFTA talks ended the fifth round without much progress and US representative called out Mexico and Canada for not engaging on the provisions that will lead to a rebalanced agreement. This rebalancing refers mainly to the US demands to increase the threshold for autos from 62.5 percent to 85 percent. Other US officials were more optimistic and that progress was made, but more on gelling than actually closing.
Oil prices rose on Wednesday as US weekly inventories showed a larger drawdown than expected as well as comments around an extension to the Organization of the Petroleum Exporting Countries (OPEC) agreement that has stabilized prices. Saudi Arabia is said to be pushing for a 9 month extension to the deal that ends in March and will try to rally the other major producers to agree to it on their November 30 meeting. Russia has not committed to such an agreement, but there are rumours that they would prefer a 6 month extension.
The USD/CAD lost 0.54 percent on Wednesday. The currency is trading at 1.2700 after the release of the November Federal Open Market Committee (FOMC) minutes. Fed voting members are likely to raise US interest rates at the December meeting, but there are concerns that some of them would like to see inflation improve. Given that the market is pricing that eventuality at near 100 percent it already has been fully priced in, so any anxiety about inflation is more likely to affect the future path of rates in 2018.
Fed Chair Janet Yellen will end her term as Chair in February and she will also step down as a Governor of the central bank as was expected when she was the Trump’s administration nominee to remain in the position. Chair Yellen favoured a hike now, inflation later approach that seems to be inline with her successor (appointment pending) Jerome Powell. Dovish voices have risen within the Fed as inflation remains stagnant, but with strong growth data and a central bank willing to normalize monetary policy the Fed is more likely to keep tightening in 2018.
The Bank of Canada (BoC) hiked twice in 2017, but that only put the Canadian benchmark rate back to 1 percent where it was when Governor Poloz cut the rate twice to boost the economy ahead of the fall of oil prices. The loonie will face more pressure as the Fed continues its monetary policy tightening pace, while the BoC will be more cautious as it monitors rising household debt.
The NAFTA renegotiations have not gone according to plan, unless the plan was to not have any progress. The dream of wrapping up negotiations before the end the year is already dead and Mexico and the United States will have to sit down to the table, while electoral noise could disrupt proceedings. Mexico will hold Presidential elections in 2018 and the US primaries will take place next year and if the few elections this year are any indications it could signal a backlash for the Republican establishment.
The price of oil rose on Wednesday. The price of West Texas Intermediate is $57.86 as the USD took a tumble ahead of the US Thanksgiving holiday. Oil touched a two year high after the US weekly inventories dropped by 1.9 million barrels. The market was forecasting a lower drawdown, but after the massive drop in API inventories on Tuesday and disruptions in North America, crude continued its way upward. Global supply is lower, thanks to the Organization of the Petroleum Exporting Countries (OPEC) and other major producers agreement to cut production levels and other disruptions to supply around the world.
The OPEC will meet with major producers on November 30 to seek an extension to the deal that takes them beyond the current March deadline.
Market events to watch this week:
Thursday, November 23
4:30 am GBP Second Estimate GDP q/q
8:30 am CAD Core Retail Sales m/m
11:30 am CHF SNB Chairman Jordan Speaks