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The Loonie trades flat despite an improvement in oil prices.

Isaac Figueroa

The USD/CAD is trading slightly weaker this morning compared with the last session, despite climbing oil prices and the weakening US dollar. A softer US dollar helped boost oil prices in this morning’s trading session. Dollar-denominated commodities like oil tend to have a direct relationship with the Loonie.

Crude was also backed by a decline in the number of rigs drilling for oil in the U.S last week. Late on Friday, Baker Hughes reported that the rig count fell by four, to 873, which is a sign of slowing production. Oil market participants continue to debate whether a decision to cut output by the Opec and its partner producers, led by Russia, will be enough to rein in a prospering supply glut and bolster prices.

The USD/CAD is having another quiet day; it opened at 1.3379 yesterday and it is trading at 1.3393 as of the time of this writing. Later today, the existing home sales number for November will be published; however, market participants are waiting for more clues from both the Fed decision in the US and the Canadian consumer price index on Wednesday. A higher increase in the Canadian CPI number compared with its principal counterparty, the US CPI, would influence a stronger Loonie and vice-versa.

The US dollar index is falling 0.24 percent this morning, pending the Fed decision this Wednesday. So far, the Fed has raised the interest rate four times this year and the expectation this Wednesday is to lift the upper bound from 2.25 to 2.50 percent. The market will be paying closer attention to the FOMC statement, accompanied by updated economic forecasts, and a press conference with Fed Chairman Powell, which will provide insight into the Feds rate path for 2019-20. The US rates market expects the Fed to sound dovish in the above mentioned events following the rate hike, which may weaken US dollar.

On top of that, the US dollar is partially influenced by difficulties in US politics around funding a wall along the southern border, which has the Democrats and Republicans struggling to control the government funding as the clock ticks toward a partial shutdown at week’s end.

The Euro was smashed lower on Friday following the release of a weak set of European PMIs. In particular, French Services and Manufacturing PMIs dropped below 50, signaling a contraction. The result seems to be partly due to the recent protests in Paris, which continue to weigh heavily on business sentiment. The composite PMI for the entire Eurozone also fell, but to 51.3; its lowest level since November 2014. According to reports on Friday, Italy and the EC are still at loggerheads over the budget deficit target, which didn’t help the Euro’s cause either.

Meanwhile, ECB rate hike expectations are slowly diminishing with money markets pricing at a 60% chance of a rate hike next calendar year, down from 75% late last week. This week’s data from the Eurozone will also likely impact these probabilities and traders will be looking to Final CPI (due today) and German Ifo Business Climate on Tuesday for more clues.

The Pound fell again on Friday as the Brexit saga continues. Theresa May has been seeking concessions from EU officials but not seemingly getting too far. GBP/USD was also dragged lower by the sell-off in EUR/USD on the day, but it wasn’t all negative for the Pound, and as the New York session got into full swing, the Pound found a bid tone.

The recovery was helped – in part – by Theresa May’s office denying reports that she hadn’t got anywhere after meeting EU officials. Meanwhile, suggestions of a second referendum are now doing the rounds, but it’s not hurting the Pound, which is continuing to push higher versus the US dollar this morning. In other weekend headlines, the Irish foreign affairs minister said that Brexit might have to be delayed if the UK submits an “entirely new” proposal on its withdrawal from the EU.

Anyhow, other than Brexit headlines and developments, traders look forward to UK CPI and Retail Sales this week. The Bank of England is due to make its monetary policy statement too, albeit we aren’t expecting any change in the base rate or too much change in the language of last month’s minutes.

The Australian dollar finished lower last week, undermined by renewed concerns over the outlook for global economic growth. On Friday, we saw the release of Chinese retail sales data, which increased by 8.1 percent YoY in November, but well below the expected 8.8 percent. We also saw the release of China Industrial Production in the same period which rose by 5.4 percent, falling short of the market's expectations of 5.9 percent.

The risk aversion that set in following the release of this data affected most of the commodity currencies, and the Aussie struggled to recover, albeit it’s off its most recent lows in London this morning.

In the week ahead, AUD/USD traders will be looking to RBA Monetary Policy Meeting Minutes on Tuesday and employment figures on Thursday.

The NZD/USD pair came under heavy selling pressure as weaker-than-expected Chinese Retail Sales, and Industrial Output saw a sell-off in global equities, which in turn led to the downward decline in the pair. The Kiwi touched a three-week low of 0.6777 and is just over the 0.6800 handle at the time of writing. Looking ahead, the local calendar is light, but the main focus this week domestically is a third-quarter gross domestic product, due out on Thursday.