This past week was an economically quiet one for the Canadian dollar; but the currency was nonetheless experiencing significant price action. In the end, the loonie was able to produce gains against all its major counterparts – but they weren’t easily won.
Canadian Dollar Confronts its Own Employment Change Data[B]
Fundamental Forecast for Canadian Dollar: [/B]Neutral
- Canadian Finance Minister Flaherty says currencies will be brought up at the G7 meeting
- Canadian Prime Minister Harper avoids a “non-confidence” vote to maintain power
This past week was an economically quiet one for the Canadian dollar; but the currency was nonetheless experiencing significant price action. In the end, the loonie was able to produce gains against all its major counterparts – but they weren’t easily won. Volatility was extraordinary; but the abnormal level of activity wasn’t the Canadian dollar’s doing. Instead, it was taking its signals from aggressive cross-market winds in risk appetite that drove everything from the US dollar to crude oil. This same fundamental relationship will likely hold into the coming week; but we may also see the key economic indicators produce their own influence on the crosses.
Before we delve into the possible drivers for price action; we first have to assess where the loonie stands in terms of market position. The benchmark USDCAD sums it up quite nicely. This pair is bridled to a wedge formation that currently holds its boundaries at 1.10 and 1.06. This congestion offers significant buffer room; but it cannot hold for long. Therefore, when we are considering the pace and direction of the currency next week; we will likely see chop with sharp and short-lived swings – that is until a meaningful breakout comes along. The most likely catalyst for spurring a new trend is a definitive shift in risk trends. However, unlike its US or Australian equivalent, the Canadian dollar sits in the middle of the risk spectrum. So, pairs like CADJPY and AUDCAD will take their guidance from the other side of the market. For USDCAD, it is a different story. Though the dollar is considered a funding currency with deep safe haven applications, the close ties between US and Canada smooth out the otherwise standout driver. To produce a genuine breakout for this economically entrenched major, we will need a definitive trend in risk appetite – like the surge in optimism through July that drove the major down nearly 1,000 points in less than a month. Fundamentals and sentiment have been long been out of whack; and the patterns that we have seen develop in key currencies, equities, bond funds and other market areas may signal that we may find resolution soon.
Despite how the underlying current of risk appetite develops over the days and weeks ahead; we should also keep our eye on key economic data to cross the wires. This is important not only for short-term bursts of volatility (a good one of these at the extreme of a range could quickly change the market’s future) but for the outlook for growth and interest rates as well as the currency’s ultimate standing in the risk spectrum. There are more than a few significant economic releases due for release over the coming week; but topping the docket is Friday’s labor data. Net changes from month to month have been very choppy but the 8.7 percent level of unemployment (the highest since January of 1998) smoothes things out. Like it is with most economies, domestic consumption is vital to Canada. However, the outlook for employment isn’t bright. The OECD predicts the nation’s jobless rate could reach 9.8 percent in late 2009. That would be a severe strain for a recovery that is expected to pace the industrialized world out of its recession with 2.1 percent growth next year (according to the IMF’s World Economic Report). Given the considerable influence consumer spending will have, expect sensitivity to significant surprises in the jobs numbers. Should a domestic recovery struggle; there may still be hope through trade. However, where Australia has the strength of a strong Asian recovery to fall back on, Canada is deeply invested in the equally stagnant US. For this reason, we will look for any official statements as to a strong US dollar policy after the G7 meeting as talking down the exchange rate could provide a much appreciated boost to shipments. - JK
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at <[email protected]>