Oil prices rebounded slightly on Friday but are still expected to show losses for the week due to concerns about slowing growth in the US and China. US crude futures rose 2.7% to $70.41 per barrel, while the Brent contract increased by 2.5% to $74.33 per barrel.
Oil, NAFTA, trade wars: any chances for the CAD?
2019-11-11 • Updated
In recent weeks, the Canadian dollar has been highly volatile. The currency was recognized as the worst-performing Group-of-10 currency in the first quarter. The unstable oil market, the unsolved NAFTA deal, and continuing trade wars put a great pressure on the loonie.
Let’s take a closer look at these factors.
The Canadian dollar is always supported by oil prices. If you compare charts of oil benchmarks and USD/CAD you will see that they move in different directions. The oil market remains highly volatile. In the middle of May 2018 oil reached the highest levels since October 2014. However, up to now, oil is suffering again. As a result, the Canadian dollar can’t gain a foothold and suffers a lot.
Another stumbling block for the rise of the Canadian dollar is a relationship between the US and Canada that has significantly worsened.
Last time when the US imposed steel and aluminum tariffs, Canada was excluded from them. It gave a hope to the Canadian economy and the Canadian dollar. However, on Thursday, May 31, Mr. Trump announced tariffs on Canada, Mexico, and the European Union. As a result, Canada announced that it will retaliate with tariffs on $12.8 billion worth of U.S. exports and challenge U.S. steel and aluminum tariffs under the NAFTA and the WTO. Canadian tariffs are supposed to be in force since July 1 and until the US lifts its measures. The Canadian economy grew in the first quarter of the year. However, excessive trade tensions will worsen the economic growth, as a result, the loonie will suffer.
Another important factor to look at is the NAFTA deal. Up to now, members of the agreement are at the deadlock. Earlier the Prime Minister of Canada Mr. Trudeau discussed NAFTA talks, saying Canada, the United States, and Mexico had come so close to a deal that he had offered to meet personally with President Donald Trump in Washington. However, up to now, the negotiations are under threat. Mr. Trump continues to warn with a possibility of no deal. Earlier he said that he is ready for a fair deal, or no deal at all. He also twitted this message to Canada:
Let’s have a look at the chart.
Although on Thursday, the Canadian economic data showed a positive GDP growth, it couldn’t support the loonie. The USD/CAD pair strongly rose. It means that economic data aren’t the major factor for the Canadian dollar. Up to now, moving averages are signaling the continuation of the consolidation as investors are not sure about the future of the factors mentioned above.
The first factor that will let the loonie to recover is the oil market. If prices are encouraging, the CAD will appreciate against the USD.
As you can see on the chart, the pair is consolidating within 1.2550-1.31. If oil prices go up, the USD/CAD pair will return to the support at 1.28. Otherwise, the pair will climb to the resistance at 1.31.
What about the long-term movement?
The NAFTA deal and the trade wars are supposed to be major factors in the long-term. If there is a progress in these issues, the Canadian dollar will appreciate, otherwise, it will suffer even more.
But let’s have a look at other factors that will affect the Canadian dollar in the future.
Morgan Stanley and Goldman Sachs created forecasts for the loonie. However, opinions of two leading banks are strongly opposite.
According to Goldman Sachs, the Canadian dollar is anticipated to strengthen over the next year. As Canadian inflation firms, the first-quarter growth is stronger than the forecast, and the greenback’s rally slows down, the USD/CAD pair will fall to $1.18. The bank is sure that the Bank of Canada will raise the interest rate at the July’s meeting.
However, Morgan Stanley doesn’t agree. Analysts of the bank see a reliance on foreign funding to finance the nation’s current account deficit and a dovish central bank as threats for the Canadian dollar. According to Morgan Stanley, an aim of USD/CAD $1.34 in a year.
As you can see, forecasts are absolutely opposite. Mostly, the future direction will depend on the Canadian central bank’s monetary policy.
Making a conclusion we can say that up to date, the Canadian dollar is under pressure. Despite the fact that the Canadian economy shows positive data, the further movement will depend on a progress of the NAFTA deal and the trade wars, and the oil prices. In the short-term. The oil prices will mostly affect the Canadian dollar. In the long-term, a realization of the Goldman Sachs and Morgan Stanley forecasts will depend on the trade wars and the NAFTA deal.
The EU plans to intervene in markets directly to curb rising energy costs, threatening to push the Euro area's economy into a deep recession.
After months of pressure from the White House, Saudi Arabia relented and agreed with other OPEC+ members to increase production.
The past several weeks have been a real triumph for the bulls in the oil market. The Brent spot price grew by 8.5% during the last month.
Gold prices are rising for three consecutive days ahead of the Federal Reserve (Fed) interest rate decision, which is expected to remain unchanged due to declining inflation and a positive economic outlook. Investors are keen on the Fed's interest rate guidance, fearing a hawkish stance that could trigger market risk aversion.
Amid concerns of a Chinese economic slowdown, reports of declining investment often overlook China's efficient investment strategy in emerging sectors for long-term growth. China has taken measures to stabilize foreign and private sector investments, like reducing the reserve requirement ratio to boost investor confidence.