The Bank of Canada (BoC) released its Business Outlook Survey
(BOS) on July 4. It wasn’t rosy. According to the survey, “forward looking sales indicators suggest soft business activity ahead”. Energy investment is forecast to decline further, hiring intentions remain modest, and capacity pressures have eased as have credit conditions.
In April, the Bank of Canada expected that the Canadian economy would be closing in on full-capacity in 2016 and 2017. The Alberta wildfires didn’t just destroy hectares of forest near Fort MacMurray, it torched the economic growth outlook as well, shaving 1.25% from the BoC’s 2016 GDP forecast.
The slowdown in US economic growth didn’t help the Canadian outlook either. If the US economic engine is sputtering, who is going to buy Canadian exports?
And that was before Brexit.
The UK vote to exit the European Union opened a nasty can of worms and left the British government in disarray. The chief cheerleaders for the Brexit side, Boris Johnson and Nigel Farage have raced away like vandals after trashing a park, leaving others to clean up their mess.
The reorganisation of the British ruling class is just getting started leaving FX markets extra-vulnerable to shocks such as yesterday’s Standard Life Investments decision to suspend trading in a UK commercial real estate fund. Tuesday’s FX markets spent the day in risk aversion mode.
Loonie could fall on oil slick
The USDCAD/WTI relationship remains intact and it seems like the correlation gets tighter during periods when key economic releases are scarce while waiting for a top tier release. Such is the case this week with US nonfarm payrolls due on Friday. (Forecast 200,000). WTI is moving lower while USDCAD rallies, almost tick for tick.
The WTI uptrend from the February low ended on June 10 with the move below $48.55. The ensuing decline stalled at the 38.2% Fibonacci retracement level of the April-June range but subsequent rallies were capped at $51.50. A daily close below $46.80 would see the 38.2% level tested again and expose WTI to further losses toward $43.35. If that happens, it is not hard to see USDCAD retesting 1.3100.
USDCAD and WTI -hourly
Saved by the range
USDCAD has bounced around within a 1.2460-1.3188 range since the end of March and despite, Brexit, there is no reason to expect the range to break, at least for the next month.
Brexit and the uncertainty surrounding the divorce has pushed a US rate hike down the road. The CME FedWatch tool assigns a probability of just 17.8% for a December hike while giving a rate cut a 3.6% probability.
Canadian interest rates aren’t going anywhere either. The BoC is still waiting to see evidence that the fiscal stimulus programs announced in March are paying dividends. That, and the uncertainty surrounding the impact of the Alberta fires will keep them on the sidelines.
Safe haven flows initially exclude Canada, Australia and New Zealand. The latter two should be preferred destinations for “fraidy capital” due their locations. Canada, and its proximity to the US should also be on the map. Selling of GBPCAD should also serve to limit USDCAD gains.
The diminished expectations for a US rate increase, a sidelined Bank of Canada and the prospect of safe-havens flows should help to keep the range intact. at least for the next few weeks.
USDCAD daily with range highlighted