The fact that the OPEC announcement was expected and already priced-in exacerbated market reactions to rumours about the duration and doubts that Russia will sign on for the full 9 months. Despite a positive move on the day of the announcement, a strong dollar led by tax reform optimism on Thursday put the price of energy at weekly lows.
Despite the united front shown in Vienna between the OPEC and other major producers, most notably Russia, there are various calls within the bloc to look for an exit strategy. Russia is keen to get back to full production, but for now will seek stability than profits. Nigeria and Libya who were exempt from the original production cut have now been limited to not exceed the levels from this year as compliance within the group will be a challenge.
US shale producers continue to ramp up production and free from weather disruptions will put pressure on crude prices that have been boosted by the effort put forth by the OPEC. The technology advances that made oil extraction cheaper created a sudden drop in prices as the OPEC sought to price them out of the market in a strategy that backfire by exchanging market share for profits.
Diplomatic stability within the producers organization will prove to be difficult as Saudi Arabia has taken a more aggressive role in domestic and regional politics which could pit it against number two and three producers Iraq and Iran.
The U.S. dollar/Canadian dollar (USD/CAD) currency pair lost 1.55 % on Friday. The currency pair is trading at 1.2695 after the Canadian jobs number defied expectations with a 79,500 positions added in November. Monthly gross domestic product (GDP) came in higher at 0.2 % but in fact confirmed the slowdown of the economy as the third quarter saw an expansion of 1.7 % and a downward revision to the second quarter data to 4.3 %. The Canadian economy grew a bit less than expected by the Bank of Canada (BoC) who had forecasted a 1.8 % gain but beat the economist forecast of 1.6 % . The number did validate the effective cool down of growth in Canada which puts the central bank on a more wait and see approach despite the solid gains seen in employment.
The loonie was on the back foot for most of the past week with the USD gaining 1.53 % in the last 4 days on the market optimism that the Trump Administration could score a victory. Expectations of a rate hike by the U.S. Federal Reserve in December are high, and already priced into the pair, but the Bank of Canada (BoC) is seen more dovish by the minute. A new Reuters survey of 30 economists shows that there is little expectation of a rate move by the Canadian central bank in December, and a third see April at the earliest.
Factors such as the precarious state of the NAFTA renegotiations and evidence of the economy slowing down have cooled the BoC’s desire to reduce further stimulus worried about the effect of higher interest rates on borrowers that hold record high levels of debt. The two data releases on Friday could confirm the headwinds facing the loonie, or in case they over perform expectations give the currency a boost against the U.S. dollar.