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USDCAD has been nearly flat over the past three days, against the backdrop of all major markets bracing for the monthly jobs report which is due for release later on Friday. Disappointing factory activity data from the U.S yesterday, helped offset the effect of the sharp decline in crude prices on the CAD, easing the divergence between two currencies which has pushed the pair up nearly 3 percent in the past couple of weeks.
The Canadian dollar has been weakened recently due to renewed concerns over the global oil surplus, as well as a train of negative economic data from the Canadian economy.
Regardless of recent positive signals showing the good-will of the world’s major producers and exporters to cooperate and stabilize the oil market, the fear over U.S producers coming back to benefit from higher prices has cast downward pressure on oil prices. U.K benchmark Brent crude fell back to below $46 per barrel while U.S WTI crude prices also slumped to below $43 per barrel.
The U.S. Energy Information Administration on Wednesday indicated that domestic crude inventories rose by 2.3 million barrels in the week ended Aug. 26, while economists had forecast the report to show an increase of only 1.1 million barrels. Last week’s buildup has been the fifth jump in the last 6 weeks. The rise in inventories, after a period of decreases, is indicating that more U.S supply is pouring into an already imbalanced market
In an interview with Bloomberg on Thursday, Russian President Vladimir Putin stated that he expected that an output freeze deal could be reached at an informal meeting later this month in Algeria. The president stated that “it was the right decision for world energy.” In spite of calling on key oil-producing countries to cap output together, Putin argued that Iran could be granted an exemption and any agreement could be reached with the Saudi side, complimenting Saudi Arabia’s Deputy Crown Prince, Mohammed bin Salman, as “a very reliable partner”.
On Friday, Saudi Arabia’s Foreign Minister Adel al-Jubeir said that he was optimistic about producers moving to a common position on oil production. “We are beginning to have a meeting of the minds but it is a work in progress and we’ll see what happens in the meeting in Algeria. And I’m hopefully optimistic,” he told reporters.
Members of the Organization of the Petroleum Exporting Countries and other non-OPEC oil exporters are due to meet on the sidelines of the International Energy Forum late in September, and are expected to set a new celling on oil output.
In terms of economic data which is the second factor going against the CAD, Canadian Trade Balance is the latest data release being watched. It is set for release at the opening of the U.S session, and is forecast to show a deficit of 3.2 million dollars, while Canadian Labor Productivity for second quarter probably rose 0.2% compared to the June period. Recent data releases have painted a gloomy picture regarding the prospects of the commodity-based economy. Recent reports from Statistics Canada indicated that retail sales fell 0.1 percent in June while Core retail sales that strip out automobiles reported an even worse performance – reporting a 0.8 percent contraction.
The drop in energy prices caused prices to fall by 0.2 percent in July compared to June. According to Statistics Canada, domestic annual inflation slowed to 1.3 percent last month, led by a 14% slump in gasoline prices in July from a year ago.
On the other hand, the U.S dollar looks set to benefit from the second rate hike since December 2015 despite much-worse-than-expected manufacturing data published on Thursday. A report from the Institute of Supply Management reported that U.S. factory activity in August contracted for the first time since February. The drop in new orders and production dragged the index down by 3.2 percentage points to a reading of 49.4.
However, solid performance in the labor market which has spurred hawkish comments from some Fed officials in recent weeks, probably could still act as a valid reason for a rate hike this month. Therefore, the NFP report out later today is being closely watched and is being considered a key factor in helping the market assess the possibility of a rate increase at the Fed’s late-September meeting.
Fig: USDCAD D1 technical chart
As can be seen from the stochastic chart, the market has been remained in the overbought zone for almost a week and the bull seems to be getting exhausted as it has not been able to support prices tick higher for the last three days. Despite having been supported by the two MAs placed below the price action, cautious sentiment has pinned the price around the 1.31000 psychological level. We may need a real push from the fundamental side to define a clear direction for the market.
Trade suggestion (based on expectation of positive NFP)
Buy Digital Call Option from 1.31000 to 1.314000 valid until 20:00 September 02, 2016