USD/CAD on front foot amid slump in oil

• CAD under pressure on a slump in oil.
• CAD is also under stress amid NAFTA uncertainty.

USD/CAD is now trading around 1.2810 in New York session, up 0.25% on a slump in oil and subdued China PMI, both negative for the CAD, being a commodity currency. Oil plunged in mid-US session by almost 2% after the EIA inventories report showed a surprised build  in crude inventories and gasoline contrary to earlier data from API. Also, Powell “shock” on Tuesday is helping the USD against most of the commodity currencies.

CAD was already under pressure on the story of Canadian oil glut as due to geographical and infrastructure issues, as Canada is forced to sell its oil to its lone customer US at a very steep discount of around 45%.

On Wednesday, Canadian economic data was mixed (industrial product price and raw material index). But earlier Canada reported a budget balance of 0.57 bln CAD against prior -2.84 bln CAD for 2017 and projects a budget/fiscal deficit of 18.1 bln CAD for 2018. Canada also projects deficit narrowing to $12.3B by 2022 and sees cumulative deficits of $98B through 2022 with Debt-to-GDP ratio to narrow to 28.4% from 30.1% in 2018

Overall, the deficit forecasts are little changed from October and Canada projected a GDP growth of 2% on average between 2017-2022. But one change in the budget was that $7.2 billion that had been allocated for infrastructure spending through 2019 has been reallocated to another departmental spending, with more than half going to veterans. Thus increasing social spending instead of infra spending may have affected the CAD too.

As par the Canadian Finance Minister, Interest rates are still accommodative and cutting the Canada deficit now would result in jobs´ losses. The budget has room for all eventualities.

The comments about keeping higher budget/fiscal deficit and higher government capex for the sake of Canadian growth and employment is negative for the CAD despite BOC is the most hawkish central bank in the G-10 universe after the Fed. But at the same time, 2 rate hikes by BOC in 2018 may be already priced in by the market.

Thus, overall CAD is under pressure on commodity and fiscal woes coupled with ongoing NAFTA jitters. All eyes may are now on Canadian GDP for Q4 on Friday, which is set to come at 2% vs. 1.7% prior.

Technically, USD/CAD now has to sustain above 1.2785 for 1.2912-1.3145; otherwise it may again come down sustaining below 1.2710 for the 1.2585-1.2449 price zone in the coming days.