The Canadian dollar fell 0.45 percent on Friday and will finish 0.78 pecan lower against the US dollar. Canadian households have a 174.1 percent debt to income ratio in 2019 Q2. Rating agencies have already downgraded some of the banks as the risk of higher defaults rises as consumers take on more credit that they can pay back, even at record low interest rates.
The resurgence of the US dollar with a strong inflation data on Thursday and beating expectations in retail sales drove the greenback higher. A 25 basis points interest rate cut by the The U.S. Federal Reserve is still priced in, but with the strong indicators it can do the bare minimum. The biggest headwind to the US economy has been the US-China trade war, but details are emerging this week that have injected optimism as tariff exemptions and delays could be paving the way for a trade deal sooner rather than later.
Gold and oil suffered setbacks this week. The yellow metal lost traction as risk appetite made a roaring return, and even the ECB guaranteeing lower rates for longer was not enough for the metal to keep trading above $1,500. Oil prices fell as oversupply concerns won out over bigger than expected drawdowns in the United States.
The main event next week will be the Fed’s monetary policy decision. The ECB did not disappoint with its actions, but the market was not overall convinced the central bank can achieve lift off of the economy on such a reduced runway. The Fed has more room to maneuver, but it could start shrinking as the White House and the market keep pushing for lower rates faster than economic indicators suggest stimulus is needed.
Gold prices rose in response to the ECB stimulus package on Thursday but gains were short-lived and the yellow metal fell short of its previous peak. This leaves gold looking rather weak after such a prolonged period of strength. $1,480 is looking increasingly vulnerable and a break could trigger a sharper correction, potentially back towards the $1,400 area. Perhaps the Fed next week can pull the gold bulls back in.
Gold is struggling to recapture last week’s high on trade optimism and after markets were disappointed with the ECB’s cut to its deposit rate and launching of a smaller than expected new bond buying program. It appears the bullish gold punchbowl argument that massive global stimulus should help propel prices is running into a wall of renewed trade optimism. An interim trade deal is likely to become the base case
Huge drawdowns or trade optimism can’t save crude from its worst weekly drop in months. Oil seems set for hard times on glut concerns and on expectations we won’t see any enhanced efforts by OPEC and allies. Some OPEC delegates hinted a larger cut could happen next year, but rising production from US and Norway will mitigate any increase to the current production cut agreement.
Oil prices have been slipping in recent days even as stock markets have rallied and inventory data has reported large drawdowns. This comes as the IEA and others continue to downgrade forecasts for demand as global economic growth fears mount. The monitoring committee for OPEC+ met on Thursday but no decision on future output cuts are expected until December. The new Saudi oil minister will be keen to reduce any deficit and lift prices ahead of the Saudi Aramco listing which could make the December meeting very interesting.