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Not a lot of data scheduled from Canada this week, which means looking at other catalysts for direction. Which way will the Loonie go?

Canada’s CPI numbers (Aug 17, 12:30 pm GMT)

Canada’s consumer prices exceeded analysts’ expectations last month, printing a 2.5% annualized increase when many had only seen a 2.3% rise in June. That’s the fastest increase in SIX years, yo!

This week market players are expecting a monthly price increase of 0.1%, same as the previous month. Core inflation is expected to dip by 0.1%, though, after rising by 0.1% in June.

Last but not the least, annualized CPI is expected to clock in a 2.4% growth after last month’s 2.5% increase.

Meanwhile, annualized CPI readings from the Bank of Canada (BOC) are expected to remain at 1.3%.

In its last policy statement the BOC isn’t too concerned over inflation, saying that only that “CPI inflation is expected to edge up further to about 2.5 per cent before settling back to 2 per cent by the second half of 2019.” Still, a significantly disappointing reading could weigh on the Loonie, so make sure you stick around for the release!

Oil and trade-related updates

As you can see below, the Loonie still takes cues from oil price action in most days. More and more analysts are pointing out that crude oil is lagging in pricing in global trade war concerns. Watch out for a potential “catching up” in case the bears wake up this week.

Meanwhile, Canada’s row with Saudi Arabia could take a backseat to the latest NAFTA-related threats. Just last weekend Trump threatened (via Twitter, of course) that he will tax Canada’s cars if his administration can make a deal. Talk about pressure!

Last Week’s Price Review

The Loonie is mixed for the week (as of 5:00 pm GMT), which a disappointing performance since it was last week’s champion.

The Loonie is a net winner, though, so it’s worth noting that the Loonie is still on track for its third consecutive week of net wins.

Overlay of CAD Pairs & Crude Oil (Black Line): 1-Hour Forex Chart
Overlay of CAD Pairs & Crude Oil (Black Line): 1-Hour Forex Chart

The Loonie started the new trading week by gapping slightly lower on most pairs. And as noted in Monday’s Asian session recap, that was apparently due to news over the weekend that Saudi Arabia suspended economic ties with Canada over Canada’s demand for “immediate release” of certain activists, which Saudi Arabia viewed as an assault on Saudi sovereignty.

The Loonie quickly regained its footing, though, probably because of rising oil prices.

Selling pressure did return during Tuesday’s U.S. session, however. And while oil prices were sliding at the time, some market analysts say and I opined in Tuesday’s U.S. session recap that the Loonie’s slide may have been a delayed reaction to worsening relations between Canada and Saudi Arabia, given that Canadian asset markets were closed on Monday in observance of Civic Holiday.

Another likely reason is that Loonie traders were just disappointed with the worse-than-expected reading for the Ivey PMI since the Loonie’s slide accelerated when that report was released.

In any case, the Loonie traded broadly lower after that before finding support when oil prices began to recover slightly.

Moving on, oil prices slumped super hard on Wednesday because of weak Chinese import data, market analysts say However, the Loonie continued to trade sideways before jumping higher during the U.S. session.

It’s not very clear why the Loonie didn’t get dragged lower when oil prices slumped. However, it’s possible that market players were staying on the sidelines because Saudi Foreign Minister Adel al-Jubeir was holding a presser at the time.

It’s even possible that market players who shorted the Loonie because of the spat with Saudi Arabia were using the presser to unwind their positions since the Saudi Foreign Minister only said that “Saudi Arabia is looking at implementing additional measures” to force Canada to apologize, but didn’t announce what the actual measures would be or when they are planned to be imposed, so the ongoing spat didn’t really escalate further.

While the presser was ongoing, The Financial Times released a report claiming that the Saudi central bank has ordered asset managers to dispose of Canadian assets “no matter the cost.” However, that didn’t really have an impact on the Loonie’s price action.

Moreover, Saudi Arabia’s Center for International Communication (CIC) promptly replied with a tweet (which was later deleted for some reason), which stated that:

“Neither the government nor the Central Bank or the state pension fund has issued any instructions regarding the sale of Canadian assets.”

A Reuters report also claimed that “the Saudi central bank had asked for their bank’s exposure to Canadian assets, but there were no instructions to sell them,” which eroded the claims of the Financial Times report even further.

And it likely helped that Canadian PM Justin Trudeau tried to somewhat appease the Saudis by using more diplomatically acceptable language on Wednesday.

In any case, the fact remains that the Loonie wasn’t dragged lower by falling oil prices for some unclear reason.

What’s clear, however, is that the Loonie jumped higher across the board when Mexican Economy Minister Ildefonso Guajardo said that Mexico and the U.S. are working hard to hammer out a bilateral deal and that Canada could “possibly” start joining NAFTA talks by next week.

After that, the Loonie slowly traded higher for a while before becoming more mixed come Thursday, which implies that market players were paying more attention to the other currencies.

The Loonie’s vulnerability to opposing currency price action worked in favor of the Loonie, though, since the euro, the pound, the Kiwi, and the Aussie were all showing weakness on Thursday.

The Loonie then continued to show vulnerability to opposing currency price action on Friday before tossing and turning when Canada’s jobs report was released.

Sellers were winning out, though, likely because the jobs report was negative overall.

Sure, 54.1K jobs were generated in July, which is much more than the expected 17.0K increase. However, jobs growth was driven exclusively by part-time employment since full-time jobs actually fell by 28K.

Moreover, the average hourly wage rate fell by 0.78% month-on-month, which is the worst reading since May 2016 and marks the third consecutive month of declines to boot.

Year-on-year, the average hourly wage rate only increased by 3.18%, which is the weakest reading in five months. It’s therefore no real wonder why sellers are winning out.

However, the Loonie is still in the green against the euro, the pound, the Kiwi, and the Aussie, which is why the Loonie is still on track to closing out the week as a net winner.