The USD/CAD has fallen to a new yearly low and continues to be weighed by unbridled risk appetite which has boosted support for commodities. Canadian dollar price action continues to be driven by oil prices as they are currently explaining 67% of volatility.
The USD/CAD has fallen to a new yearly low and continues to be weighed by unbridled risk appetite which has boosted support for commodities. Canadian dollar price action continues to be driven by oil prices as they are currently explaining 67% of volatility. Interest rate expectations have seen their influence weaken as both the BoC and Fed are expected to keep rates on hold until next year. The Canadian economy appears to have emerged from its recession in better shape, which may lead the Canadian central bank to be the first to raise rates. However, Americans remain the largest consumers of Canadian goods and until the U.S. economy rebounds the BoC may remain cautious.
BoC Interest Rate Expectations
Interest rate expectations for the BoC over the next twelve months spiked higher today to 81 bps on the back of positive results from Alcoa the largest aluminum producer. Overnight index swaps still remain below the high of 102.2 set on August 6th due to the central bank’s commitment to keep rates on hold until mid-2010. Governor Carney has reaffirmed the committee’s position as policy makers remain concerned over the local currency’s appreciation. Fears are that the “loonie’s” strength could limit the scope of a recovery as it would suppress U.S. demand for exports. Therefore, unless we start to see inflation risks rise considerably, yield expectations will have limited influence. Tomorrow’s employment report is expected to show the economy added jobs for a consecutive month which could raise inflation expectations as wages are a main driver of broader prices.
FOMC Interest Rate Expectations
Fed funds futures are currently pricing in a 4.2% chance of a rate hike by the end of the year which is up from 0.0% yesterday which could be due to hawkish comments from Federal Reserve Bank of Kansas City President Thomas Hoenig. The FOMC alternate stated that the central bank should start raising rates sooner rather than later as “much time would pass before incremental increases could be considered tight or even neutral policy.” If U.S. interest rate expectations continue to rise, it could have a supporting effect on the USD/CAD. This could be the case as markets have started to price in an aggressive move by the Fed in January with a 1.4% chance of a 75 bps rate hike. If additional committee members begin to beat the drum for tightening then we could see the greenback find broad based support.
Oil markets are back on the march higher as an improving global economy has fuel demand expectations. Crude is looking to test the yearly high of 75.00 set on August 25th which could spell more bullish “loonie” sentiment. Corporate earnings season is here and if we see continued improvement in profits then risk appetite may continue to grow. This will keep commodities supported along with related currencies like the Canadian dollar. The U.S. department of energy slightly raised their forecast for crude production for 2009 to 29.2 million barrels per day from 29.01. If demand is expected to outpace the increase in output then we could see oil continue to rise. Especially since the Energy Information Administration predicts that production may have peaked in August and will gradually decline throughout the winter until March.
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