Today’s ISM services data put the question of a US recession back to the test. And given Canada’s tight trading relationship with the US and the Bank of Canada’s inclination to hike rates, the good US news is also good for the loonie. It’s been enough for the market to largely ignore the slump in oil prices.
WTI crude is down $3.24 to $91.18 and that’s just a hair from the July low of $90.57. A close here would be the worst since the February outbreak of the war in Ukraine.
The drop in oil comes despite a lackluster OPEC+ decision. The group of producers added a token amount to supplies and warned about dwindling global inventories. Here’s a CIBC chart showing OECD commercial inventories. They’re 236 million barrels belwo the 2015-2019 average.
USD/CAD is down 26 pips today to 1.2855 after rising as high as 1.2891.
The main driver is the ebulient mood in risk assets. The Nasdaq is up 2.6% as the market rethinks the impact of higher rates even as the Fed pushes back.
In terms of the Bank of Canada, they surprised markets with a 100 bps hike last month to 2.50%. The market is divided roughly 50/50 on whether we will see 50 or 75 at the September meeting. The terminal top is at 3.58% in January, which is about 10 bps higher than the Fed.
BOC Governor Macklem indicated they were front-loading hikes with the big hike last month but didn’t give clear guidance on what’s coming next. Canadian trade balance on Thursday and Friday’s Canadian jobs report will be important inputs for the central bank.