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Loonie Gets a Boost Ahead of Key US Fed Meeting at 2pm

Published September 21, 2016
  • USDCAD has dropped into the mid 1.3100's this morning, influenced by a near 2% rise in oil prices
  • The WTI contract for November delivery is trading at $44.90 a barrel having just come on as the front month contract after October rolled off yesterday
  • Prices seem to have been propped up by an unexpected draw on US crude inventories as reported by industry group API and further chatter from OPEC officials on the merits of a production deal 
  • If this morning's official inventory data from the US EIA at 1030am ET confirm the API reports, then this rally in crude could extend 
  • Following today's oil data is the event that everyone has been waiting for – the Fed's interest rate decision at 2pm ET followed by Chair Janet Yellen's press conference and updated Summary of Economic Projections at 230pm ET
  • The base case across the market is for the Fed to hold rates in the current 0.25-0.50 bps target range
  • According to futures markets there is only a 17% chance of a hike today (Chart 2) and to put that into perspective, each rate hike over the last 15 years has been preceded by at least an 80% implied probability; in other words, surprise hikes are extremely rare
  • That said, the Fed is at present rather divided upon the appropriate amount of monetary stimulus for an economy that is exhibiting strong labour trends (unemployment 4.9%) but weak inflation (which is trending below their 2% target)
  • Given that so many Fed officials have sounded rather hawkish leading up to this meeting, a highly probable outcome is that they hold rates today but deliver a statement which clearly sets the stage for a December rate hike
  • There is currently a 52% chance of a rate hike in December so if the Fed does signal that they are strongly leading that way, the market would have to adjust which may drive up the front end of the US yield curve causing a broad rally for the greenback against most G10 currencies 
  • Likewise, if they don't hike and deliver a dovish statement we would likely see yields and the USD decline
  • USDCAD could prove very volatile today with a dovish Fed likely leading to a move below 1.3100 and potentially a larger pull back to range lows near 1.2825 in the near term; while a hawkish Fed may push us above the 200DMA at 1.3255 which could precipitate the next leg higher into the 1.3500/36 region 

Charts: (1) USDCAD formed a base at 1.2825 and now looks set for a test of range highs circa 1.3255. (2) Fed Rate Hike Probability. (3) Economic Calendar.