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Loonie Treads Water Ahead of Key CPI & Retail Sales Data

Published September 23, 2016
  • USDCAD is milling about in the mid 1.3000's as post-FOMC USD losses are consolidated
  • The technical bias is for the Loonie to show further strength in the near term with a move to the lower end of USDCAD's recent 1.2825-1.3255 range the more probable outcome
  • However, there remains lots of risk to this thesis starting with this morning's Canadian CPI and Retail Sales data released at 830am ET
  • The market is looking for Core CPI to print at a 2.0% annualized pace, slightly below the 2.1% reading from July
  • Headline Retail Sales are expected to rebound by 0.1% in July after a -0.1% drop in June
  • On an ex-autos basis, sales plunged -0.8% in June and economists are expecting a strong 0.5% rebound for July once car and truck sales are stripped
  • Given the dovish tone that BoC Governor Stephen Poloz expressed in his speech this Tuesday, any downward deviation to these numbers would likely be met with lower GoC yields and a lower Loonie; a move back above USDCAD 1.3100 is certainly not out of the question
  • Should we close above 1.3100, then the case for a deeper USDCAD pull back would be negated in the near to medium term
  • Conversely, a close today below 1.3036 – 50% retracement of the September rise – would keep the Loonie bulls happy and the bottom of our recent range within their sights
  • Adding to the potentially volatile end of week are headlines that Saudi Arabia has extended a production deal to Iran ahead of OPEC's meeting in Algeria next week from Sept. 26-28th
  • The deal calls for Saudi Arabia to lower its oil production if Iran agrees to cap output at its current level of 3.6M bpd
  • At first glance this deal seems rather one sided – how much production will the Saudis cut? What is the marginal cost to Iran of lower output in the near term? And will other OPEC producers, namely Kuwait, UAE and Iraq also cut in order to make the terms more palatable?
  • Given these questions it still seems unlikely that a deal gets done and thus this meeting may turn out to be a classic "buy the rumour, sell the fact" event for oil prices
  • That said, one has to give a nod to history and the penchant for the Saudis to surprise markets; the last two OPEC meetings that took place in Algeria in 2004 and 2008 led to unexpected production cuts to prop up prices…
  • Lots to consider for USDCAD traders over the next few days so plan ahead as best you can

Charts: (1) USDCAD failed near range highs of 1.3255, set for a pull back. (2) Fed Rate Hike Probability. (3) Economic Calendar.