Canadian Dollar Outlook: OPEC and BoC Meetings Make CAD 'Too Hot to Handle'
- Written by: Gary Howes
The OPEC meeting on Friday promises to be explosive ensuring CAD volatility should rise but support should come from the Bank of Canada who will likely hint that no further interest rate cuts lie ahead.
“With so much potential volatility, we think oil currencies are a bit too hot to handle right now." - BMO Capital.
The Canadian dollar will be in focus on Wednesday the 2nd of December when the Bank of Canada delivers its latest policy decision and assessment.
Analysts and traders alike are unanimous in their view that no decision will be delivered, which on the face of it, should be pro-CAD.
However, the assessment of the economy and the outlook delivered by the BoC could pose risks to both the upside and downside.
Ahead of the decision it was shown that Q3 GDP data came in at 2.3% as expected.
"After a difficult start to the year, Canada’s economy is finally growing again. The increase in nominal GDP is encouraging because that’s good news for public finances at both the federal and provincial levels. Trade has turned into a major contributor to growth thanks to the US resurgence which, together with a more competitive Canadian dollar, is boosting exports," says Krishen Rangasamy at NBF Economics.
According to BMO Capital’s Stephen Gallo the data should be good enough to take a rate cut completely off the table.
BMO’s economists expect the tone of the Interest Rate Announcement to be cautiously upbeat, similar to that released in October.
In addition to highlighting Q3 Canadian GDP, the Announcement is expected to touch on recent positive US data and likely spill overs from the US economy over the medium term.
“The BoC should offer some offsetting negative comments about commodity prices, but the BoC is unlikely to comment directly on the exchange rate. If there were a press conference, there might be an opportunity for Poloz to play up monetary divergence and perhaps talk USDCAD higher,” says Gallo.
BMO say they would be buyers on USDCAD on dips heading in to the BoC, “but we would be reluctant to chase any move above 1.3400 prior to Wednesday,” says Gallo.
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OPEC Meeting - What Will Saudi Do?
Looking beyond the BoC it is the issue of the pricing of Canada's key export that will provide the lion's share of excitement later in the week. Oil prices remain central to the Canadian dollar outlook.
The 168th OPEC meeting on Friday comes amidst an environment of uncharacteristically low oil prices which are hurting high-cost producers across the world, particularly in Canada.
The meeting starts at 10:00AM C.E.T and continues through the day until the Secretary General’s press conference at 16:00 CET.
Will Saudi Arabia be willing to entertain a reduction in output to push prices higher?
Such a move has so far been resisted as OPEC’s most influential member has been intent on pushing prices lower in order to try and bankrupt high-cost North American and Russian producers.
“The Saudis softened their rhetoric a couple of weeks ago and said they would be willing to entertain a discussion of how to control prices at this meeting. This shift has helped keep oil from sliding below $40, but it came with little cost,” say BMO.
Keeping the floor under oil will likely require output cuts, or at least the curtailment of ‘cheating’ against quotas. Given the Saudi stance, it appears there is good two-way risk for oil at the OPEC meeting say BMO.
Analysts at the Canadian investment bank reckon a failure to achieve an agreement to support prices could see oil prices drop another 5-10% to levels below $40. Any type of agreement could see at least a 10% oil rally back to the high $40s.
“With so much potential volatility, we think oil currencies are a bit too hot to handle right now. CAD is at the top of the list of oil currencies, so our comment about being too hot to handle includes USDCAD. We’d be buyers on dips ahead of Friday, but we’d be reluctant to take a major position or to carry a wide stop on any dip purchase,” say BMO.
