The Canadian dollar started the trading week on the wrong foot after oil futures dropped with the prospect of further drilling in the U.S. to add to the already oversupplied market. With little economic releases this week on the Canada front at the beginning of the week the CAD was exposed to a swing in commodity prices. Traders will be focused on the U.S. Federal Reserve and Bank of Japan (BOJ) monetary policy meetings this week.

The Fed is expected to stand pat on Wednesday, July 27 but the market is pricing in at 20 percent the probability of a rate hike in September according to the CME’s FedWatch tool. The Bank of Japan is facing strong pressure to act, specially after the government led by Shinzo Abe has secured political majority in the upper house. A new round of fiscal stimulus is expected, but BOJ Governor Haruhiko Kuroda has denied the use of helicopter money to get the Japanese economy away from the pull of deflation.

The loonie will have to thread through difficult waters until the release of the monthly GDP figures on Friday. The second quarter was a disappointment and there are serious fundamental issues in Canada which unfortunately fall outside what the government and the central bank have any control over. The fall in commodity prices continues as the presidential race enter the long final stretch in the U.S.. Risk aversion and volatile markets await with energy producers left with little to do after the Doha talks failed to reach even the slightest hope of cooperation.



The USD/CAD lost 0.634 percent in the last 24 hours. The pair is trading at 1.3211 after the price of crude has fallen more than 2 percent. The Canadian economy has not been able to shake its dependancy on natural resources despite the efforts from the government and the Bank of Canada (BoC). The weakness in oil prices puts the CAD in a precarious position on the face of macro economic and political headwinds. The trade links with the U.S. are a positive for Canadian fundamentals, but given the divisive rhetoric from U.S. candidates nothing is to be taken for granted until a winner is declared.

Geopolitical risk is also at play in the energy sector as the wide gap between Organization of the Petroleum Exporting Countries (OPEC) members Iran and Saudi Arabia pulverized any hope of an output freeze agreement being put into place despite players such as Russia onboard. Slowing global demand will put pressure on central banks to ease to avoid falling further into deflation. The Bank of Japan (BOJ) is viewed by many as the most likely to add to its already massive stimulus package, but the timing could be later rather than sooner. 
The Bank of England (BoE) and the European Central Bank (ECB) are also anticipated to act. BoE governor Mark Carney has already tipped easing in the summer, which leaves the upcoming August 4 monetary policy meeting available.

The Bank of Canada (BoC) acted proactively last year ahead of the fall of oil prices, but at 0.50 percent the benchmark rate does not offer much room for easing. Unconventional measures have been talked about, but the central bank is opting to wait for the impact of the government’s fiscal package to be felt in the fall before it commits to more conventional and/or unconventional monetary policy tools.



West Texas oil lost 2.336 in the last 24 hours. The price of crude is trading at $42.57 after fewer disruptions in output mean that the growing oversupply persists. Refineries are cutting back as there is lower demand for oil byproducts and energy importers opting for storage to keep taking advantage of rock bottom prices.

CAD events to watch this week:

Wednesday, July 27
10:30 am USD Crude Oil Inventories
2:00 pm USD FOMC Statement
Thursday, July 28
Tentative JPY Monetary Policy Statement
Friday, July 29
8:30 am CAD GDP m/m
8:30 am CAD RMPI m/m
8:30 am CAD IPPI m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar