Canadian dollar leads USD damage

It was another day of disappointing US data reports, showing industrial production posting its biggest drop since August 2012 at -0.6% and the NY Fed’s manufacturing index hitting the lowest level since January 2013. 24 hours after disappointing US retail sales, the US dollar sustained a one-two punch against all major currencies. ECB president Draghi’s conference gave the euro an initial boost after unveiling higher figures on inflation expectations and reiterating that there would be no rate cut in the deposit rate. The Canadian dollar soared alongside oil.

Loonie outperforms FX

The Canadian dollar was the biggest performing currency on a combination of soaring oil price and the Bank of Canada’s upgrade of economic growth beyond what traders had been anticipating. Q1 GDP was revised to 0.0% from 1.5%, but Q2 was revised up to 1.8% from 1.5% and Q3 to 2.8% from 2.0%. Overall, the BOC sees 2015 growth at 1.9%. Inflation was also revised upwards, indicating the impact of lower oil prices was more front loaded than expected, but not larger.

As oil enters its 4^th consecutive weekly gain, Bank of Canada Governor Poloz said he was very confident the non-energy sectors of economy would do the bulk of the recovery to stabilize the overall outlook. He expects Q1 data flow to look quite negative, but it was too soon to judge whether Q1 GDP was “atrocious”.

Poloz said the oil shock was masking the positive economic signals, stating that growth in the export sector was double that of rest of economy. BoC deputy governor Wilkins said long-term unemployment rate starting to fall Wilkins says signs in housing market point to soft landing. Poloz said there are signs of improvement in labour market, noting that the initial effects from the oil shock were virtually immediate, thereby underlining the effectiveness of January’s shock rate cut and highlighting its insurance nature and that it was a one off action. The key issue for policymakers is whether the impact of the oil shock, which is happening faster than expected, is also larger than thought.

Oil takes out 100-DMA for first time since August

Oil’s gains took it above the 100-day moving average for the first time since August, hitting a 3-month high of $56.20 in WTI. Aside from existing USD weakness helping the fuel, the EIA showed inventories of US crude oil to have plummeted by 88% last week to 1.29 mn barrels versus expectations of 3.54 mn barrels. If oil closes the week above $51.81, it would be the fourth straight weekly gain.

Speaking of the 100-day moving average, take a look where it is on the USDCAD chart below.