USD/CAD on front foot despite an upbeat Canadian CPI report on Friday

• CAD under pressure on Canadian oil glut and ongoing NAFTA uncertainty.
• All focus now on Canadian GDP data later this week.

USD/CAD is now trading around 1.2680, in late New York session, inching by 0.20% for the day amid an uptick in US dollar on some optimistic comments by Fed’s Bullard, a known dove coupled with a glut in Canadian crude oil, which is negative for the overall Canadian economy. But USDCAD is now off the day high of 1.2710 scaled on Monday.

On Friday, Canadian core CPI and also the headline CPI came  upbeat. But despite that the CAD came under pressure on Monday on concerns that the glut in Canadian crude oil may be negative for GDP, which is slated for release later this week along with a deluge of other vital economic data.

Over the past month, overall Canadian economic data were mostly on the softer side including retail sales which dropped -0.8% at the end of the year. Economists were looking for softer consumer demand but they did not anticipate sales falling by the largest amount in a one month period since March 2016. 

Despite the USD is looking weak across the G-10 universe, it’s outperforming against the CAD, which is under stress for some structural reasons like the Canadian oil glut, NAFTA jitters, renewed worries about Canadian housing and a muted Canadian jobs´ report for January after strong months in December and November’17.

Canadian crude oil is now selling at a steep discount of almost 45% to US oil refineries. In fact, due to a geographical issue, the US is the lone customer of Canadian oil as Canada is surrounded by oceans in three directions, leaving only the USA for its oil supply.

On the other side, US have now plenty of its own shell oil and do not require Canadian oil at all. Thus Canada is almost forced to sell its oil to the US at a very steep discount, which is affecting its macroeconomy and the currency.  Thus CAD is now underperforming against all the other G-10 currencies.

Canada may be also affected by ongoing NAFTA uncertainty like the UK on Brexit, although to a much lesser extent. BOC has also warned that private capex decisions are being delayed because business wants clarity on trade. At the same time, US may be the only beneficiary of the ongoing NAFTA jitters as companies may be finding the US as the safest out of NAFTA countries.

Technically, for USD/CAD, the area of 1.2627 is now a vital support and in that scenario, USDCAD may rally further toward the 1.2755-1.2912 price zone in the coming days.