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Loonie in Tight Range Ahead of Friday’s Jobs Data; Correlation with Oil Breaks Down

Published October 6, 2016
  • USDCAD traded in a very tight range overnight – with spot hovering on either side of the 1.3200 handle – as the market settles in ahead of Friday's dual employment reports from the US and Canada
  • Canada is forecast to report a gain of 10k jobs with the unemployment rate steady at 7%
  • Meanwhile, the US is looking for a gain of 175k and the unemployment rate to hold at 4.9%
  • Yesterday, Canada reported an improvement in trade as the deficit shrunk on higher exports; welcome news to the Bank of Canada who have been circling their exporting wagons for sometime now…
  • Price action in the Loonie has been rather stubborn lately as neither yesterday's strong trade data nor oil prices knocking on the door with a 50$ handle have been able to spark a round of CAD strength 
  • If you take a look at Chart 2 below, WTI's correlation with the Loonie (CAD/USD) is at its lowest since May and, at 0.017, is almost in negative territory meaning the two would move in opposite directions…
  • If oil does run into resistance at $50 and sees a subsequent pull back into the mid to low 40's, then I would suspect this correlation to show some mean reversion and approach the 0.6 – 0.7 level, likely corresponding with a much lower Loonie and USDCAD above 1.3300…
  • This morning, the US reported much better than expected jobless claims for last week (249k vs. 257k expected) while building permits in Canada rose 10% in August compared with a mere 3% expectation
  • US short term yields continue to move in the upper end of their range, with the 2-year at 0.85 this morning compared with 0.76 at the end of September; this should put a bid under the USD on a broad basis against most G10 currencies

Charts: (1) USDCAD tests key 200 DMA. (2) WTI and Loonie correlation breaks down. (3) Economic Calendar.