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It’s an Oil Story as Loonie Falls on IEA Outlook Despite Dovish Fed

Published September 13, 2016
  • USDCAD is testing the 1.3100 level again this morning despite a relatively dovish outlook from Fed Governor Lael Brainard yesterday which led to a marked decline in both US treasury yields and the probability of a rate hike this year
  • She acknowledged that labour markets have improved and that consumer sentiment is strong, however, her concerns over lower global demand left her tilting towards maintaining stimulus in the face of what is likely to be a lower global growth and inflation profile for years to come
  • Markets responded by pushing US yields lower, with the front end of the curve giving up most of their gains made since late last week
  • US 2 year yields fell 7% to 0.75% following her comments, while the chances of a rate hike at next week's Fed meeting fell to a mere 14% from around 25% just prior to her speech (Chart 2)
  • The Loonie has failed to capitalize on the move lower in US yields; that narrative has been usurped by lower oil prices on a gloomy outlook from the International Energy Agency (IEA)
  • In a report released yesterday, the IEA conclude that a sharp slowdown in global oil demand growth coupled with ballooning inventories and rising supply means the crude market will be oversupplied at least through the first six months of 2017
  • They had previously expected the oil market to be balanced by the end of this year, so this a material shift in expectations
  • As a result, we are seeing crude prices fall across the curve with the front month contract down over 2% to $45.25 for WTI
  • USDCAD is taking its cues from oil and is once again testing resistance just above the 1.3100 handle
  • With low oil prices stifling foreign direct investment in Canada, in turn crimping the high paying jobs market throughout Alberta's oil patch, it is difficult to make a case for the Loonie to see a significant bout of strength in the near to medium term
  • Corporates which are short USD into the end of the year should be looking to hedge a good portion of those exposures if they are able to plan ahead

Charts: (1) USDCAD forms a base near 1.2825. (2) Fed interest rate hike probability. (3) Economic Calendar.