Will oil (or CAD) continue its rally?

Market Wrap

  • A sudden break in US-Venezuela relations due to Trump’s administration backing Venezuelan National Assembly leader, Juan Guaido as the interim president. This may prompt the US to retaliate by expanding existing sanctions on their energy trade with Venezuela and could further complicate OPEC’s relation with the US.
  • OPEC’s secretary general reportedly said OPEC do not rule out cutting oil production in their next meeting in April if industrialized nations continue to build up their oil inventories above the five-year
  • US government reopens temporarily till 15th February after Trump signed a stopgap funding measure. However, Trump threatened to resume the shutdown if his demands for funding of the border wall is not met by the end of the deadline or could be forced to bypass Congress by declaring a national emergency to build the border wall using military resources through powers afforded to him by the constitution.
  • US 10-year and 30-year treasury bond yields edged up to 2.753% and 3.062% respectively on news of a temporary deal to reopen the US government
  • Canada’s core retail sales came in weaker than expected; registering at -0.6% MoM as opposed to forecasted -0.4%. This was also much weaker than the previous period of -0.2%.
  • The US CB Consumer Confidence data on Tuesday came in worse than expected at 120.2 MoM compared to 125.0 from previous period due to the government shutdown in the previous
  • The US fed signal it would hold off raising interest in the coming months and will be “patient” in completing their balance sheet normalization. As a result of these dovish comments, Dow and other risk sensitive assets surged on early Thursday morning.

The Week Ahead

  • All eyes on the outcome of the high-level trade talks between China’s top trade negotiator; Vice Premier Liu He, US Trade Representative Robert Lighthizer and US Treasury Secretary Steven Mnuchin today.
  • Canada’s GDP data release on today will provide a clue as to how its economy is performing with the improving but still relatively depressed oil price
  • US Non-Farm Payrolls on Friday expected to be much weaker at 165,000 than previous period of 312,000 due to the US government shutdown.
  • US Unemployment rate, on the other hand, is expected to improve to 3.8% from the previous period of 3.9%.
  • US ISM Manufacturing PMI on Friday forecasted to improve slightly to 54.3 from 54.1 in the previous

US related events to dominate for the rest of the week...

Last week saw many positive news for both Oil and the CAD, which helped to boost the buyer’s confidence and pushed oil prices up (and down for USD/CAD) to retest crucial levels. The rise in US bond yields also failed to stem the decline of USD as the news of US government reopening took precedence.

The US Fed also signaled earlier today that they would be“patient” in future rate hikes and in competing their balance sheet normalization. As a result, equities and other risk sensitive assets rose higher.

Given that there are limited high impact news on CAD and Oil in the remainder of this week, sentiments will most likely be driven by news from the US and other geopolitical developments. Next on the list would be the outcome of the US-China trade talks today and the NFP data on Friday.

Although the US-China trade talks has seen some positive developments lately, it still remains fragile with China resisting to enforcement actions and deeper reforms demanded by the US. These factors were the basis for the tariffs in the first place. However, since high-ranking officials are involved in the meeting, we could very well see some improvements in trade talks. It is definitely in the interests of both parties to de-escalate tensions (given the negative effects on both economies so far) before the expiry of the truce. Therefore, at least a middle ground or some understanding could be reached temporarily– even if there remain issues to be resolved.

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