Fundamentally, it was a heavy period for the Canadian dollar last week. However, the data flow that was coming off the docket would ultimately be drowned out by risk considerations and the health of the nation’s largest trade partner, thereby consigning the currency to ranges.
Canadian Dollar Doesn’t Act Like an Economy Ahead of Recovery Curve
Fundamental Forecast for Canadian Dollar: Bearish
- Retail sales disappoint. Can Canada return to growth before the US?
- Consumer inflation slows to its weakest pace in 15 years, prompting little need for rate hikes
- Will chop turn to trend next week? Read the weekly technical report to track resistance and support
Fundamentally, it was a heavy period for the Canadian dollar last week. However, the data flow that was coming off the docket would ultimately be drowned out by risk considerations and the health of the nation’s largest trade partner, thereby consigning the currency to ranges. However, despite the market’s immediate dismissal of the data that crossed the wires; it nonetheless has its value in providing bearings on growth and potential policy shifts in the weeks and months ahead. In brief economic activity slowed with a drop in factory shipments (the seventh in nine months), an unexpected contraction in retail sales and a rise in first quarter productivity owing to a sharp drop in employment. Combined with a report for the lowest level of consumer inflation in 14 years, and there is a clear bias for the future. Despite the data and warnings from policy officials, the Canadian dollar continues to trade at a premium to its US counterpart; but will this status quo be maintained into the future?
With the Canadian dollar – as it is with all major currencies – the real fundamental concern is whether the economy is indeed on pace for a recovery and if the loonie is ahead of the curve. Policy officials seem to think so. After the G8 meeting last weekend, Finance Minister Jim Flaherty offered his bullish sentiments on the health of his economy. Like so many others, he said the initial signs of recovery are visible. More subjective was his claim that Canada was ‘leading’ its contemporaries by producing one of the largest financial stimulus packages, with ‘eighty percent’ of their promised funds already behind specific initiatives. This comparative positioning on strength perhaps offsets the relatively dour growth forecasts and record deficit projected this year. On the other hand, is this reason enough to discuss government exit strategies when recession is still in place and financial uncertainty still prevails? Canadian officials have taken the cautious route in their rhetoric; but full-blown optimism could work for the loonie. Though, positive forecasts does not guarantee positive growth. Once again, Canada is just as susceptible to the health of the global economy and financial market as its next door neighbor – the US.
Another lingering threat to the Canadian dollar’s performance is the commentary on the currency from Flaherty or BoC Governor Mark Carnery. In the recent past, the latter has said the sharp appreciation in the loonie may completely offset the effects of domestic growth. Fin Min Flaherty has even turned the crosshairs on traders, saying there seemed a ‘speculative element’ to the rapid appreciation. Should their jawboning become more frequent or aggressive; it could the FX crowd – though there is as of yet little threat of action on officials’ part.
From the economic docket, there is only the international securities transactions report to take note of; but this indicator is merely an interesting reading on capital flows rather than a catalyst for volatility. Through the week, it will be interesting to monitor the direction and the pace of the different crosses to intuit different truths for the Canadian unit. CADJPY will be used to highlight the dollar’s sensitive to risk trends. USDCAD will act as a scale for domestic and foreign growth. And, AUDCAD will gauge loonie traders’ interest in commodity correlations. - JK