The Canadian dollar gained ground against the US dollar yesterday morning after the US government reported soft inflation levels. Furthermore, the loonie also got a boost on contraction in the US crude oil inventories. The trend remained unchanged this morning with the USD/CAD pair losing about 20 pips to trade at 1.3265 levels.
Economic data, contraction in US crude inventories propel the Canadian dollar
In December, the US producer prices recorded their steepest decline in more than two years, mainly due to a drop in the costs of trade services and energy products, adding to signs of weak inflation that could make the Federal Reserve rethink interest rate hikes this year.
The Labor Department reported a drop in the producer price index by 0.2% percent after nudging up by 0.1% in the previous month. That was the first drop since February 2017 and the most significant decline since August 2016.
In the year ended December, the PPI rose 2.5%, matching the gain recorded in November. Economists surveyed by Reuters had estimated that the PPI would fall 0.1% in December and gain 2.5% on a y-o-y basis.
In the energy market, U.S. West Texas Intermediate crude futures for February initially rose above $52 per barrel after the US Energy Department reported a 2.7 million barrels decline in the crude inventories. Likewise, Brent crude futures for March delivery rose above $61.30 per barrel. However, both WTI and Brent crude lost 35 cents and 29 cents to close at $51.96 and $61.03, respectively.
While gasoline stockpiles increased by 7.5 million barrels, distillate inventories grew by 3 million barrels. Analysts anticipated a decline of 250,000 barrels in crude stockpiles, a jump of 2.6 million barrels for gasoline, and an increase of 900,000 barrels for distillates.
Commenting on the price of crude, Matthew Smith, director of commodity research at ClipperData, said: “Any bullish sentiment from the crude draw has been vanquished by emphatic builds to the products – particularly with gasoline, lifting inventories some 6 percent above the five-year average.”
Still, the decrease in inventory is a positive for the Canadian dollar as the country is a major crude producer and exporter.
Commenting on the Canadian dollar’s consolidation, Brad Schruder, director of corporate sales and structuring at BMO Capital Markets, said: “The loonie has gained slightly over the last two sessions but the moves are muted. There is no significant interest by large corporate firms to get involved here.”
Furthermore, an upbeat assessment of the Canadian economy by Finance Minister Bill Morneau is also lending support to the Canadian dollar. Morneau also stated that Brexit related developments in the UK are unlikely to affect the Canadian economy.
Morneau said: “We’re watching closely what’s going on in the United Kingdom. It’s obviously an enormous challenge for the Conservative government there. We don’t see this as something that’s directly problematic for the Canadian economy, but obviously, it’s something that’s difficult for the global economy.”
The economic data and decline in crude oil inventories favor the strengthening of the Canadian dollar in the short-term.
Technically, the USD/CAD pair is moving along the descending channel as shown in the image below. Additionally, the MACD indicator is making new lows in the negative region. As a result, we can expect the USD/CAD pair to move down further.
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