USD/CAD Weekly Fundamental Analysis, April 25 – April 29, 2016 -Forecast

The USD/CAD fell to its lowest level since the week-ending July 3, 2015 last week, settling at 1.2682, down 0.0131 or -1.02%, driven lower by the rise in crude oil prices.

The Canadian Dollar was also supported by two key economic reports – a much better than expected report on Canadian retail sales for February and a consumer price index report that showed the so called “core” inflation rate increased in March to 2.1 percent, which economists said is still hovering near the Bank of Canada’s target.

The challenge for USD/CAD bears will be this week’s Fed interest rate decision and monetary policy statement. We should find out whether the direction of the U.S. rates is a bigger influence on the Forex pair than oil prices.

Unlike some commodity-linked currencies, the rally by the Canadian Dollar isn’t a major threat to the economic growth outlook, partly because it has been accompanied by a rebound in oil prices, which is positive.

The oil current rally is being driven by an investor sentiment that is becoming more and more convinced that the worst is over and the global oil market rebalancing process is already taking place.

Strong gasoline consumption in the United States, increasing signs of declining production around the world, and oil field outages are the key factors underpinning the market at this time.

Traders also pointed to strong crude imports to China in March as providing support to prices. Another supportive factor has been producers taking advantage of higher prices by locking in production.

Falling output, especially in the United States, where many producers have reeled from an up to 70 percent oil price rout since 2014, has also helped to lift the market. On Friday, it was announced by Baker Hughes that the number or rigs drilling for oil in U.S. fields declined for a fifth straight week, falling by 8 to a total of 382. At this point last year, the major oil companies were operating 703 oil rigs.

Upside momentum continues to drive this market higher and is expected to continue next week. Traders seem to be ignoring the fact that the world market remains oversupplied by between 1 and 2 million barrels per day.

This being said, investors are focusing more on the future than on the now and believe this situation will eventually balance. Unless, the key OPEC countries decide to ramp up production, the market should continue to trade steady-to-higher over the near-term until it reaches the psychological $50.00 level. Last week’s price action also suggests a convincing trade through $39.00 will be a sign of weakness.

The U.S. Federal Reserve will issue its interest rate decision and monetary policy statement on Wednesday after holding a two-day meeting.

The Fed is widely expected to leave interest rates unchanged with only 2.3 percent of traders looking for a rate hike. However, its monetary policy statement may contain language that boosts the possibility of a rate hike in June.

In its last statement, the central bank reduced the number of potential rate hikes from four to two, citing threats from global headwinds. Since these have failed to materialize, the Fed may hint at resuming its tightening cycle in June.

The way I see it, rising oil prices and a hawkish Fed is likely to yield a neutral to bullish reaction by the USD/CAD. Rising oil prices and a dovish Fed will be bearish for the USD/CAD. Finally, weaker oil prices this week, coupled with a hawkish Fed will be bullish for the U.S. Dollar.

FxEmpire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more recent analysis and information in our weekly reports and we provide daily updates and outlooks.

Major Economic Events for the week:

Monday, April 25, 2016

AUD        ANZAC Day Holiday

NZD        ANZAC Day Holiday

Tuesday, April 26, 2016

Wednesday, April 27, 2016

Thursday, April 28, 2016

Friday, April 29, 2016

  JPY        Showa Day Holiday

Government Bond Auctions

Date Time       Country           Auction

Apr 25 N/A UK 2.5% July 2065 Gilt (Syndicated tap)

Apr 25 11:35 Germany Eur 1.5bn Apr 2017 Bubill

Apr 26 11:10 Italy Holds BTPei auction

Apr 26 19:00 US Holds 2-year note auction

Apr 27 11:03 Sweden Holds bond auction

Apr 27 11:10 Italy Holds CTZ auction

Apr 27 11:30 Germany Eur 1bn 2.5% Aug 2046 Bund

Apr 27 19:00 US 2-year FRN, 5-year note auctions

Apr 28 11:10 Italy Holds 5yr/10yr bond auctions

Apr 28 19:00 US Holds 7-year note auction