Canadian Dollar Strength May Hinge on Break in Oil

The Canadian dollar was one of the strongest major currencies over the past week, but this was mostly the result of broad US dollar weakness rather than commodity prices since oil prices continued to consolidate between $77/bbl and $80/bbl. Furthermore, fundamental forces didn’t really play into the currency’s moves as there was no major economic data on hand. That said, the one notable indicator was released on Friday, when data showed that Canada’s trade deficit narrowed to a three month low in September. The deficit eased to C$927 million from C$1.99 billion in August thanks to a 3.5 percent increase in exports, suggesting that foreign demand may help to alleviate some of the nation’s economic woes. Going forward, a break in either direction for oil is likely to translate into a similar move for the Canadian dollar versus the US dollar, but the trend remains in favor of Loonie strength.

Overall, upcoming economic reports out of Canada are anticipated to reflect improving conditions. On Monday, manufacturing sales for the month of September are projected to rise by 1.7 percent following a drop of 2.1 percent in August, but the actual results could prove to be even better given the jump in exports during the same period.

On Wednesday, the annual rate of Canadian headline CPI growth for October is projected to bounce back up to 0.1 percent from -0.9 percent, while the Bank of Canada’s core measure is projected to rise to 1.7 percent from 1.5 percent. Such results would suggest that higher commodity costs are providing some support for the headline CPI measures, while improving domestic demand has lifted broader prices. The Bank of Canada said in their most recent policy statement that “overall risks to its inflation projection are tilted slightly to the downside,” but if we see both headline and core measures of CPI climb higher than expected, the Canadian dollar could rally.