CAD: Crude oil prices bring upside in Canadian dollar
Crude oil prices extended its gains yesterday after the OPEC monthly report showed the oil market is going to be a lot tighter than initially thought. In its latest monthly outlook, the oil group said the market may experience a shortfall of 3.3mb/d in the fourth quarter of the year. This came in above expectations, and would make it one of the largest deficits in more than a decade. The oil market could get even tighter if the economic data starts to improve for China after a host of stimulus measures announced over the last several weeks. This has led to some analysts expecting $100 oil could be a possibility, despite scope for this artificially created tightness to soften from October when refinery demand for crude oil slows due to maintenance. Still, focus is likely to stay on crude oil for now as 10-month highs have been reached, and this is prompting a recovery in CAD.
USDCAD retreated from last week’s highs of 1.3695 to test the short-term support at 0.236 retracement of 1.3553. The price of oil directly influences CAD as oil is one of Canada's major exports. Meanwhile, despite the central bank leaving its interest rate on hold at 5% at the last meeting, a stronger-than-expected jobs report on Friday has boosted the odds of another rate hike later in the year. Headline job gains came in at +39.9k for August vs. expectations of +20k with wages also firmer than expected. While possibility of more rate hikes may be low given Q2 GDP growth was negative, the wage pressures may also prevent the BOC from turning outright dovish anytime soon.
This could open up the room for a recovery in CAD after the recent weakness, both from aa run higher in oil prices. Canadian economy also could benefit due to the resilience of the US economy. Meanwhile, USDCAD has rallied from lows of 1.3093 in mid-July to 1.3695 last week so correction may be due. However, worth noting that higher oil prices could also bump up the US inflation outlook once again while strengthening the economic outlook as US is also a net energy exporter. This could mean that King Dollar could continue to reign, and that could restrain oil for now. EUR and JPY could come under pressure with the increase in oil prices for being primarily energy importers.
Market Takeaway: USDCAD has room to retrace recent gains if oil prices continue to surge, but US CPI today could be key. EURCAD may be a more direct oil play as Canada benefits with higher oil prices while Europe stands to lose.