Canada Markets

Undoubtedly there were a number of factors driving commodities and currencies in Wednesday's trade, but many markets acted as if the long-talked-about increase in interest rates in the United States, the first increase in nine years, will not take place tomorrow as was once expected.

Whether this hike happens or not, it will be watched closely by global market traders. Should it happen, the hike could result in upward pressure in the U.S. dollar against foreign currencies, which could lead to further weakness in Canada's currency. A higher U.S. dollar will weigh further on U.S. dollar denominated commodities, which could result in weaker grain prices on U.S. exchanges. The move may be viewed as favorable by some Canadian analysts who view the hike as a sign of a strengthening economy since that could bode well for Canada's exports into this market. However, others will be concerned Bank of Canada may be pressured to follow suit, which may impede Canada's recovery.

Markets moved in such a fashion today that would suggest the hike will not take place tomorrow. The U.S. dollar weakened against foreign currencies; commodities such as gold and oil moved higher, as well as equities, perhaps the opposite of what would be expected before an expected hike.

The Canadian dollar trade on Wednesday was influenced by a weakening U.S. dollar against the Canadian currency, a move higher in crude oil and gold, as well as favorable economic data released in Canada.

Statistics Canada reported that Canada's factory sales increased 1.7% in July, above the expected 1.1% increase with the third consecutive monthly increase and perhaps supportive of the Bank of Canada's claims that the Canadian economy is on the rebound. This is indeed the trend long sought-after, given the manufacturing sector's delayed response to the lower Canadian dollar.

Weekly U.S. energy data indicated a drop in U.S. inventory for the first time in three weeks, viewed as positive for crude oil prices, while crude oil production data was reported as being lower for the sixth week, also a supportive feature. Crude oil ended $2.56/barrel or 5.7% higher at $47.15/barrel. This was the second close above the contract's 50-day moving average in 12 days.

The Canadian dollar posted a significant gain along with crude oil, with the December Canadian dollar future ending 43 basis points higher at $.7590 CAD/USD. While today's move saw a break-out from the triangle pattern, as shown by the upward and downward-sloping blue lines on the attached chart, the loonie has seen consolidated trade over the past two weeks and so far this week, remains consolidated within last week's range. In fact, today's high of $.7598 is just 1 basis point below last week's high, while also holding just below psychological resistance at 76 cents.

While investors remain bearish on the Canadian dollar, as seen in the second study histogram, they have reduced their net-short position by 18,765 contracts or 27.8% to 48,640 contracts in the past four week as of the most recent CFTC data on September 8. This is the fourth consecutive week that they have reduced this net short (futures only) position and is the smallest net-short seen in seven weeks.

The lower-study shows the stochastic momentum indicators drifting sideways while in over-sold territory, which can leave the market prone to a sudden change in direction.

Thursday's release from the U.S. Federal Reserve will be watched closely, while the price-action of many commodities, equity markets and currencies on Wednesday suggests that the hike has been pushed further down the road.

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Cliff Jamieson can be reached at cliff.jamieson@dtn.com

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