The Canadian dollar has put up strong resistance to the powerful comeback rally seen in the US dollar this May. Why, and can it continue to resist the Greenback?
Data showing a fall in oil inventories sparked another recovery in crude prices this week which has lent support to the currencies of major oil producers.
The ruble, Canadian dollar and Mexican peso all rose versus the dollar after data from the Energy Information Administration (EIA) revealed an unexpected 3.4million fall in stockpiled barrels.
The outcome wrong-footed market expectations for a 714k rise.
The USD/RUB fell 1.89%, to 64.97 at the time of writing, with a substantial portion resulting from the EIA inventory data.
USD/CAD fell by 0.62% to 1.2835, recoiling yet further from the 1.3000 recently reached corrective peak, and the quantity of Mexican Pesos purchasable with a single dollar dropped 0.30% to 17.94.
The EIA data also showed a fall in Distillate Inventories of 1.65m, which was deeper than the 1.00m expected, and a -1.23m drop in Gasoline Inventories compared to the 0.73m forecast. It was the first fall in inventories reported since March.
Wildfires in Alberta which burned down virtually an entire oil industry town, destroying over 2500 homes in the process were blamed for a fall in supply to the US which caused the inventory drop.
However, oil prices had fallen after news on Tuesday that the oil sand wells where the fires had raged were in the process of being restarted tentatively on Tuesday.
Outages in Nigeria, however, offset reports Alberta was starting to get back online, and the inventory news finally pushed crude prices back up by over 3.15% to 46.11 dollars per barrel at the time of writing.
Estimates that the fires in Alberta could knock between 1 and 2.5 basis points off Canadian annualized GDP weighed heavily on the Canadian dollar, offsetting gains from the disruption in production. However, these losses, which helped push USD/CAD up to 1.3000 were recouped following the Inventory news, which helped CAD rise over half a percent versus the dollar.
Oil prices had been losing upward momentum as they reached close to the 50 dollar mark due to expectations that at that level a large number of US shale producers will revive their operations increasing supply again and therefore offsetting rising prices.
Some analysts, however, think this is unlikely as oil has fallen to a new lower long-term price range making shale production too risky.
The process of fracking for shale oil is a costly one and requires large amounts of capital which is easier in a low interest rate environment, however, such an environment is unlikely to last as the Fed exits its easy money cycle and prepares to raise interest rates.
The dollar had already seen its May rally stall versus the majority of counterparts before the oil release but we would be wary to call the end of the dollar's recovery.
While the probability of a June hike looks unlikely we have heard analysts say markets continue to under-estimate the amount of interest rate rises that will come out of the Fed in 2016.