What's lifting the Canadian dollar to start the week?
The underlying factor is the growing realization that we're in a global energy crisis. Some prices have come down but that's due to the US SPR release, covid lockdowns and demand destruction but the underlying supply-demand fundamentals are broken.
In terms of today, here are five things:
1) Oil prices are higher
A US State Dept official on the weekend after Biden's trip to the Middle East said "Based on what we heard on the trip, I'm pretty confident that we'll see a few more steps in the coming weeks". The market isn't buying it, oil is up $2 to start the week and flirting with $100.
2) Saudi Arabia also talked about increasing capacity to 13 mbpd by 2027
Saudi Arabia purports to have 12 million barrels per day of current production and produced 10.65 mbpd in June. Many market participants are skeptical and Mohammed Bin Salman said it would raise capacity to 2027 it added to skepticism. Five years to add 1 mbpd? There's some capacity there but the strange conversation between Macron and Biden in June where he told the US president that Saudi Arabia maybe has 150k bpd of capacity rings true.
3) Growing fears of a Russian cutoff
The more the market learns about Nord Stream 1 and the potential for a shutdown, the worse it sounds. The turbine sent from Canada now won't arrive until July 24 and will take until early August to install. Moreover, a German official said it was a backup, adding to the idea the whole thing is simply a pretext. The pipeline is scheduled to restart on July 22, if it doesn't Europe will be in its worst crisis since WWII. With that, Canada's position as a reliable supplier and ally with enormous oil and gas reserves is an incredible opportunity. The political winds in Canada around oil and gas extraction are changing. The LNG Canada project is going to end up as a $50 billion project. We could end up building 3-4 more of those.
4) Canadian housing starts today were decent
Canada's housing market is clearly in a correction but I'm more optimistic it won't be a crash. Today's CMHC data on housing starts was at 273.8K compared to 265.0K expected. There's still a shortage of homes in the market. Last week's 100 bps hike from the Bank of Canada will be a further shock and it's an area to keep a very close eye on but I'm more optimistic than I was a month ago.
5) The US dollar is lower
The main driver of USD/CAD today is the US dollar, which is moderately lower across the board. The loonie is flat against the euro and Australian dollar. The drag on the dollar is from a shift in market thinking around the odds of a 100 bps hike. That's fallen to 20% from 80% on Thursday and will keep US Fed funds just below the BOC's overnight rate.
Outlook:
The rejection after the surge above 1.31 on Thursday raises the possibility of a top in USD/CAD but I think it's only a temporary reprieve. An energy crisis may have some silver linings for Canada but falling global growth is still a negative for the loonie. European economic activity could soon crater and there are signs China may not be so willing to stimulate as it struggles with covid.By the turn of the year, I expect the outlook to improve but so much hinges on what Russia decides to do on Friday.
I spoke about these themes today with BNNBloomberg: