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Loonie Rises as OPEC Agrees to Output Target; Questions Remain

Published September 29, 2016
  • USDCAD dropped as much as 1.7% from yesterday's highs as OPEC announced their first agreement on production in over eight years
  • The market is currently hovering around the 1.3100 level from a high of 1.3279 yesterday
  • WTI oil rose as much as 5% to $47.47 yesterday but has yet to surpass September's high of $47.75
  • Details of the agreement are still not finalized and, while at first blush the news is certainly positive for Canada and the Loonie, there remains a lot to be skeptical about
  • First, OPEC only agreed in principle that they should reduce production by 200k-700k barrels per day; this would curb output from August's 33.2 million bpd by a very modest amount
  • To put that in perspective, OPEC agreed to cut production by 4.2M bpd in 2008
  • Second, the cuts are not finalized and will not commence until at least November when OPEC meets again to ratify the agreement; anything could happen prior to that meeting, including increased production in the short term to take advantage ahead of quota introduction
  • Third, details are lacking on who will cut production and who will enforce those cuts; past agreements have been notoriously difficult to monitor
  • USDCAD traders will want to note that a 700k bpd decline in November would have the potential to bring supply and demand in balance by the end of 2016 which would be good for the Loonie and oil prices…
  • …However, if they reduce production by 200k bpd, that would only put a minor dent into current oversupply and leave the market out of balance until late 2017 which is what the IEA is currently forecasting anyways
  • It seems that OPEC has merely bought itself time; details remain thin and there has been no comment yet from the Saudis following yesterday's initial announcement
  • The Loonie may continue to benefit in the short term but risks are heightened into the end of the week with July's GDP report due at 830am ET Friday morning
  • Given the poor data of late from Canada and the dovish tone from BoC Governor Poloz, a downside miss remains a possibility which would have the potential to push USDCAD right back up towards 1.3200 and possibly beyond

Charts: (1) USDCAD may test support circa 1.3000. (2) WTI Oil holding at trend line resistance. (3) Economic Calendar.