Canadian Dollar Ends Higher on Oil Bounce, Soft U.S. Data

February 13, 2015 Wall Street Journal

February 12, 2015
By: Nirmala Menon

OTTAWA–The Canadian dollar is closing higher for the first time in three days Thursday as oil prices rebounded above $50 a barrel and weak U.S. data weighed on the greenback.

The U.S. dollar was most recently at C$1.2493, up from C$1.2628 at Wednesday’s close, according to data provider CQG.

Prices for oil, a key Canadian export, jumped as much as 5.3% to $51.41 a barrel during the session, which also helped to lift other commodities such as copper.

The combination of surging oil and softer-than-expected U.S. retail sales put downward pressure on the U.S. dollar/Canadian dollar pair, said Scott Smith, senior market analyst at Cambridge Mercantile Group.

News that Germany and France brokered a cease-fire deal with Russia to end nearly a year of fighting in Ukraine also weighed on the U.S. dollar as it raised investors’ risk appetite, which benefited currencies like the Canadian dollar, he said.

U.S. retail sales fell 0.8% in January, the second monthly decline and sharper than the 0.5% drop predicted by economists surveyed by The Wall Street Journal.

Initial jobless claims in the U.S. also rose more than forecast in the week ended Feb. 7.

Mr. Smith said the weak retail sales challenge the view consumers would reallocate savings from cheaper energy costs into other sectors, and raises caution that the Federal Reserve may delay raising interest rates if data continue to come in below forecasts.

The expected rate rise in the U.S contrasts sharply with a dovish Bank of Canada. That underpins the recent widening in U.S-Canada interest rate spreads, which has added to the Canadian dollar’s weakness.

The Canadian central bank cut interest rates unexpectedly last month, citing it as “insurance” against the expected hit from lower oil prices, and many economists expect a further reduction at its March policy meeting.

Analysts said the broader story of a strong U.S. dollar against its Canadian counterpart has not changed.

“The underlying trend dynamics for (the currency pair) remain constructive and, absent any clear signals that the longer term trend is reversing, we still rather think that short-term dips in the market are a buying opportunity,” TD Securities said in a report.

The Canadian dollar will likely extend gains on Friday if oil prices continue to rise, and if Canada’s manufacturing sales report due at 8:30 a.m. EDT comes in strong, Mr. Scott said. On the other hand, weaker than-expected data are likely to drag on the Canadian dollar.

The consensus call is for manufacturing sales to bounce back 0.9% from November’s 1.4% decline, according to a report from Royal Bank of Canada.