Bank of Canada and cheaper oil guides Loonie to a negative territory
23.01.2020, 12:31

Bank of Canada and cheaper oil guides Loonie to a negative territory

Canadian dollar lost ground after pretty dovish comments made by the Bank of Canada in its interest rate announcement and monetary policy report on Wednesday. USD/CAD was trading near 1.3050 before the BoC news were released and climbed to 1.3160 as a market reaction still evolve.

Since autumn 2019, the BoC Governing Council was occupied with the deteriorating global outlook that was affecting Canada's economy through weaker exports and manufacturing sector with distinct effects of uncertainty for companies' investment decisions. But, in December, the Council members used much more optimistic language demonstrating a good resilience of the local economy as global situation generally improved.

Yesterday the Governor Stephen S. Poloz admitted that uncertainty remain elevated inside Canadian economy itself, while the economy data showed a significant slowdown extended to continue in the fourth quarter 2019. "We also received a string of disappointing readings related to the Canadian consumer. Vehicle sales, retail sales more generally, consumer confidence and job growth all softened", said Poloz at a press conference.

Mr Poloz was also anxious of weaker business investment level. The Council even stated in its official comments that "during the past year Canadians have been saving a larger share of their incomes, which could signal increase consumer caution". These statistic phenomena surfaced despite better external condition.

So, it looks like the Canadian central bank keeps open the door to a possible interest rate cut in next coming months. Chances of such a scenario on March 4, 2020 meeting jumped to 20%.

The Loonie downside shift was significantly extended by the oil prices that dropped on Wednesday evening and continue to slide. US Crude oil futures closed the day yesterday near $56/bbl and are expected to move below $55/bbl.

Reuters and Bloomberg cited China's coronavirus and the International Energy Agency (EIA) forecast of an additional output surplus (1 million barrels per day in 2020) as a reason for oil prices strong fall. But, the real reasons looks to be much deeper. The market players mostly rely on oversupply conception and they are not ready to believe in a remarkable and long-lasting growth to high prices like $70/bbl for Brent futures or $63-65/bbl for WTI. The jil market have performed two local highs on Sept 16, 2019 and on Jan 8, 2020 just after a drone attack in Saudi Arabia and after Iran missiles hit US military base in Iraq. In both cases oil prices bounced back quickly. It could mean the fundamental sentiment on oil is seen rather weak. To reverse the sentiment substantially some new force majeure geopolitical factors should evolve. Speculative sellers may feel buyers' hesitations and they are just waiting for an opportunity to push the prices lower. If they succeed, the market may continue its downtrend in oil prices for even $3/bbl or $4/bbl more, which could help USD/CAD to climb also to a higher targets like 1.3250 or 1.33. In an alternative scenario, if the oil prices would be able to rebound to $58.5/bbl on US Crude and to $65.5/bbl on Brent oil futures short covering avalanche will be enabled in automatic mode by many sellers. This will prompt a rebound of the Loonie in "parallel orbit" with the oil price movements. However the possible strengthening of USD/CAD beyond 1.3070 could be limited in the absence of new Canada economy data and due to the market expectations of Bank of Canada policy easing.


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