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Limited Gains for Loonie From OPEC

Published December 1, 2016
  • USDCAD briefly traded to a three week low in the mid 1.3300's yesterday just before OPEC announced their production cut, but has since recovered to trade in a tight range in the mid 1.3400's
  • While the cut in oil supplies is certainly welcomed by the Canadian oil industry, it seems a few forces are at work that may have contributed to the Loonie largely ignoring the 10% pop in WTI
  • First, the deal is contingent on non-OPEC Russia agreeing to a 600k/bpd cut to its own production, which is not without precedent as Russia did join OPEC's 2001 cut; however, Russia is at present fighting two proxy wars against OPEC king-pin Saudi Arabia in Yemen and Syria, so a dose of skepticism is not completely unfounded
  • Second, this agreement reduces OPEC supply starting in January 2017 to output levels equivalent to January 2016, when the cartel was producing at a record pace and prices fell to 10 year lows
  • Third, the recent rise in the US rig count as prices once again approach $50 a barrel indicates that the US is more than willing to pick up the production slack; this should keep a lid on prices and prevent the forward curve from entering backwardation which would signal a fundamental tightening of supply/demand rather than a cursory pop in near term prices
  • Ultimately, the market is rather cautious regarding this cut and that can be seen in the fact that prices are below the highs reached when the deal was first announced in September
  • The larger influence on USDCAD continues to be the increase in US yields on expectations of faster GDP growth and rising inflation
  • Analysts at Goldman Sachs believe that the Fed will be forced to raise rates faster than the market currently assumes which will only add to the tailwinds for the USD
  • US 10 year yields are at 2.4% now for a stunning 40% rise in 14 days and the move could still have legs
  • GDP growth was strong in Q3 in Canada but that was largely due to a rebound in resource extraction after the Alberta wildfires – we need broad based growth in export services to gain confidence that the recovering is picking up steam
  • With this in mind, interest rate differentials should continue to favour the dollar over the Loonie in the medium term despite yesterday's OPEC announcement 

(1) USDCAD supported by diverging US-CA 2yr yields. (2) OPEC output levels. (3) WTI Oil. (4) Economic Calendar.