The Canadian dollar recorded a near one-and-a-half-year low against the greenback yesterday after crude oil prices declined sharply. Poor macroeconomic data also played a part in pushing the Canadian dollar to new lows.
Crude oil price decline trigger Canadian dollar selloff
On Tuesday, oil prices collapsed to new yearly lows, pulled down by a more profound feeling of global economic chaos and worries over surplus supply on the oil market itself. There were several reasons for the unexpected meltdown. Rising inventories of crude oil and anticipated increases in shale production weighed on oil prices, but the price collapse was complemented by a wider selloff in equity markets.
The American Petroleum Institute (API) detailed an unexpected inventory build of 3.45 million barrels of crude oil for the week ending December the 14th, compared to analyst anticipations that crude oil inventories would decline by 2.475 million barrels. A week earlier, the API reported a draw of more than ten million barrels. However, a day later, the EIA issued a somewhat dull report that showed a considerably smaller draw of 1.2 million barrels.
Yesterday, US oil prices plummeted 7.3% to $46.24, the lowest since August 2017. The US crude contract settled below $50 per barrel for the first time since October 2017. Brent crude futures declined by 5.6% to $ 56.26 per barrel a day after the $60 threshold was breached.
The price decline reflects the mounting concern about sustained inventory overhangs in the United States, regardless of the new OPEC and non-OPEC inventory reduction deal that came into force at the start of this year.
Broader fears of a global economic slowdown led to a Monday crash in US equities and stocks in Asia also fell sharply on Tuesday. The Dow Jones Industrial Average has declined by 12% since the beginning of October, and the S&P 500 has decreased by almost 5% on a y-o-y basis.
It is anticipated that the Federal Reserve will announce another rate increase this week. Rising interest rates were blamed for increased borrowing costs, leading to the strengthening of the US dollar, infusing volatility into emerging markets, and initiating capital flight in some countries.
In addition to the crude oil price decline, economic data also pushed the Canadian dollar downhill. Yesterday, Statistics Canada said that manufacturing sales dropped 0.1% in October to $58.2 billion. Economists had anticipated an increase of 0.4%, according to Thomson Reuters Eikon.
The decline was due to a drop in the sales of wood products and primary metal industries, partly offset by higher sales in the food and machinery industries.
Overall, sales declined in seven out of 21 industries tracked, representing 40.5% of the manufacturing sector. While sales of durable goods decreased 0.9% to $30.0 billion, sales of non-durable goods rose 0.7% to $28.3 billion.
Today, during the American session, the US Federal Reserve is scheduled to issue a policy statement that could have a tremendous impact on the Canadian currency and the rest of the Forex market. The US Federal Reserve is expected to raise the benchmark lending rate to 2.25%-2.50%. Furthermore, in the statement that will be issued post-meeting, the Fed watchers anticipate the central bank to avoid including the phrase “we will continue with gradual rate increases.” A rate hike is positive for the US dollar.
Commenting on the rate hike, George Goncalves, head of fixed-income strategy at Nomura, said: “The economy is decelerating. They were too optimistic on their outlook, but by the same token, they’re going to have to walk a fine line that they’re not overly concerned. They’re just going to take it down a notch.”
Therefore, fundamentals favor the rise of the USDCAD pair. Technically, the USDCAD pair has broken a long-term resistance at 1.3180 levels. The currency pair is also moving along the ascending channel. Additionally, the accumulation indicator is also making new highs. As a result, we can expect the uptrend to continue.
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