Canadian Dollar Decoupling from Crude Oil Prices, At Risk of Reversal

Another disappointing string of economic data left the Canadian dollar exactly flat against its US namesake, and yet another weekly gain in Crude Oil prices proved insufficient to push the Loonie beyond its recent peaks. Indeed, USD/CAD bears finally showed signs of noteworthy exhaustion, and its previously tight correlation faded quickly despite strong oil price gains. The Loonie showed initial technical promise on a potential head & shoulders reversal formation pointing to further losses, but the end-of-week US Dollar recovery suggests short-term momentum may continue to the topside. In fact, our two Technical Strategists maintain that the pair may have set an important low at the 1.0780 mark. Fundamental outlook is far less clear, however, and the week ahead promises short-term volatility on key economic reports.

[B]Canadian Dollar Decoupling from Crude Oil Prices, At Risk of Reversal[/B]

[B]Fundamental Forecast for Canadian Dollar: Bearish[/B]

  •   [Canadian Housing Starts improve](http://www.dailyfx.com/story/market_alerts/fundamental_alert/Canadian_Housing_Starts_Improve_Off_1244464166311.html) off of worst levels in over a decade
    
  •   Forex [sentiment accurately called for further USD/CAD losses](http://www.dailyfx.com/story/topheadline/Forex_Trader_Sentiment_Points_to_1244728731169.html)
    
  •   Futures positioning likewise suggests [USD/CAD may have bottomed](http://www.dailyfx.com/story/charting_center/futures_positioning_cot_report/COT__Speculators_Trim_Euro_Longs_1244485313094.html)
    

Another disappointing string of economic data left the Canadian dollar exactly flat against its US namesake, and yet another weekly gain in Crude Oil prices proved insufficient to push the Loonie beyond its recent peaks. Indeed, USD/CAD bears finally showed signs of noteworthy exhaustion, and its previously tight correlation faded quickly despite strong oil price gains. The Loonie showed initial technical promise on a potential head & shoulders reversal formation pointing to further losses, but the end-of-week US Dollar recovery suggests short-term momentum may continue to the topside. In fact, our two Technical Strategists maintain that the pair may have set an important low at the 1.0780 mark. Fundamental outlook is far less clear, however, and the week ahead promises short-term volatility on key economic reports.

Manufacturing Shipments data, Leading Indicator figures, and Retail Sales results could all bring noteworthy shifts in domestic economic sentiment. The highly trade-dependent Canadian economy has seen exports plummet on weak global consumer demand, and dour forecasts for April Manufacturing Shipments data shows few expect a noteworthy rebound. Manufacturing and data remains of significant concern to domestic policy makers, as the sector singlehandedly led job losses through recent Unemployment Change reports. A continued decline in external demand for Canadian goods would bode poorly for the domestic economy and could finally provide the impetus for the Bank of Canada to engage in more expansionary monetary policy. Below-forecast results in Manufacturing could likewise influence Leading Indicators data, and further declines in employment could easily derail the recent recovery in domestic Retail Sales.

Markets will keep a close eye on Bank of Canada developmentsā€”especially as they relate to unconventional Quantitative and Credit Easing measures. In a recent BoC report, we argued that it is only a matter of time before the central bank joins the ranks of the US Federal Reserve and other key counterparts in announcing aggressive monetary expansionary measures. Any such announcement could quite easily derail the recent Canadian Dollar uptrend. We will otherwise keep a close eye out for a sustained shift in commodity price trends. Continued rallies in energy prices have generally supported the domestic currency, but the recent decoupling arguably bodes poorly for the CAD. A significant turnaround would likely only exacerbate a nascent USD/CAD bounce off of multi-month lows. - DR