Bullish Oil Fails to Dent USD CAD Exchange Rate as Fed Hike Bets Remain High

October 18, 2017 - Written by David Woodsmith

STORY LINK Bullish Oil Fails to Dent USD CAD Exchange Rate as Fed Hike Bets Remain High

A solid run of US data has helped to keep the US Dollar Canadian Dollar exchange rate on a generally stronger footing this week, painting a more encouraging picture of the domestic economy.

US industrial production showed a moderate rebound on the month in September, largely shaking off any negative impact from the recent hurricanes.

As analysts at Wells Fargo noted:

‘Overall output increased 0.3 percent as the Fed estimated a quarter percentage point drag from the effects of hurricanes. Industrial production fell at a 1.5 percent annualized rate in the third quarter, but according to Fed estimates, this figure would have been an increase of at least 0.5 percent had it not been for the effects of the storms.

‘In 2015, industrial production fell in 11 out of 12 months as a retrenchment in the energy sector weighed on mining output along with other factors like a (then) stronger dollar and weak global growth backdrop.

‘Looking into the remaining months of the year and considering the outlook for 2018, we look for industrial production to ramp-up modestly. The factors that weighed on growth in recent years have either reversed altogether or at least faded.’

With the import price index also picking up this helped to keep market expectations for an imminent Federal Reserve interest rate hike elevated, to the benefit of the ‘Greenback’.

Bullish Oil Market Supports Canadian Dollar Demand

Even so, the mood towards the Canadian Dollar recovered somewhat on Wednesday morning as oil prices continued to push higher.

While Iraqi forces retook the oil-rich area of Kirkuk from the Kurds this failed to put any renewed pressure on the oil market, with conflict in the region still likely to disrupt supplies in the near future.

As global demand for oil appears to have recovered somewhat in recent months Brent crude has found greater support, helping to buoy up the commodity-correlated Canadian Dollar.

A temporary easing in market concerns over the impending renegotiation of the North American Free Trade Agreement (NAFTA) also encouraged the ‘Loonie’ to recover some ground against its rivals.

However, with the future shape of the trade agreement still in question thanks to the Trump administration’s protectionist agenda the USD CAD exchange rate maintained a stronger footing today.

Demand for the Canadian Dollar could weaken further this afternoon, though, in response to August’s Canadian manufacturing shipments data.

Forecasts point towards a fresh contraction in sales on the month, which may undermine optimism in the outlook of the domestic economy.

If this gives the Bank of Canada (BOC) further incentive to maintain a neutral policy outlook in the coming months then CAD exchange rates are likely to trend generally lower.

US Dollar May Soften on Disappointing Housing Market Data

The mood towards the US Dollar could sour, however, as September’s domestic housing starts and building permits figures are expected to show fresh signs of weakness.

A softer housing market may give Fed policymakers some cause for pause, although the odds of an imminent rate hike are unlikely to particularly diminish unless there is a significant downside surprise.

USD exchange rates could also see volatility in response to the latest Federal Reserve Beige Book, which may add to monetary tightening expectations.

As analysts at Nomura commented:

‘In preparation for the October FOMC meeting, we expect the Beige Book to point to sustained economic activity albeit with some transitory disruptions due to the recent hurricanes. In particular, activity in the 11th district (Dallas) and sixth district (Atlanta) will likely provide more anecdotal evidence on the impact from Hurricanes Harvey and Irma, respectively.’

Providing that the report highlights stronger underlying conditions within the world’s largest economy then the US Dollar is likely to remain on a bullish trend against its rivals.

However, if the case for a more aggressive pace of monetary tightening is seen to remain limited, thanks in large part to weaker inflationary pressure, then the USD CAD exchange rate could falter.

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TAGS: Canadian Dollar Forecasts