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Oil, CAD Retreat Ahead of EIA Data and Fed Minutes

Published August 17, 2016
  • Overnight market action was rather subdued with mixed results across Asian and European indices and an expected lower open for both New York and Toronto 
  • Key data this morning comes from the US Energy Information Agency's weekly oil inventory report at 1030am ET and at 2pm, the minutes from July's US Federal Reserve meeting
  • The Loonie is well off its highs reached yesterday as USDCAD trades just under the 1.2800 handle from a low of 1.2698 early yesterday morning and Oil is 0.5% lower to $46.30 a barrel
  • With a massive 19% rally in WTI futures over the last ten days, one would think that the underlying data would support the view that inventories are reflecting a re-balancing of supply and demand
  • However, this has hardly been the case and the fundamental trajectory of the market remains decidedly bearish: oil product inventories remain above their seasonal averages and there has been little positive economic news emerging from demand centres to instigate what would need to be a meaningful erosion of product overhang
  • Despite this, the International Energy Agency has claimed that they see the market re-balancing and the Saudis have claimed they are ready to discuss production adjustment amongst OPEC producers (again); this rally has the feel of being sentiment driven and thus could turn bearish at any moment
  • Indicative of the uncertainty is the abnormally large open interest in WTI with large short and long positions held by spec traders at the CFTC, a clear indication of the competing forces in the market at present
  • As for the Fed minutes, the market has received plenty of jaw boning from both hawks and doves lately which will likely be reflected again today
  • Yesterday, Williams, a noted dove, released a paper calling for policy makers to readjust their thinking regarding the natural rate of inflation; he argues that it is much lower than in previous economic cycles and thus interest rate expectations may remain tethered to the lower bound much longer than previously expected 
  • In contrast, this morning his colleague and noted hawk, Dudley, stated that recent trends in US labour markets justify a rate hike as soon as September
  • Watch for language surrounding where the Fed sees the balance of risks going forward as well – language regarding their confidence that current employment trends will support a sustainable rise in inflation to their target 2% threshold

Charts: USDCAD back to range trading as uptrend broken – 1.2760 could be further support after yesterday's 7-week low right at 1.2800.  Move above 1.3000 needed to get USD bulls excited again.