Canadian Dollar Lets Fundamentals Lead the Way

Commercial Content Analysts
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In two weeks, the Canadian dollar has rallied over 600 points against its US counterpart – taking out major technical levels along the way. Admittedly, this aggressive pace behind this specific pair has had a lot to do with the weakness in the greenback as risk appetite sweeps over the market.

[B]Canadian Dollar Lets Fundamentals Lead the Way[/B]

[B]Fundamental Outlook for Canadian Dollar: [/B][B]Bullish[/B]

In two weeks, the Canadian dollar has rallied over 600 points against its US counterpart – taking out major technical levels along the way. Admittedly, this aggressive pace behind this specific pair has had a lot to do with the weakness in the greenback as risk appetite sweeps over the market. However, even measuring the loonie’s strength apart from the dollar, it is clear that this currency is one of the strongest in the FX market. Looking ahead to next week, while there is the threat of a relief retracement, sound fundamentals and financial stability that imbues the currency with a positive correlation to risk appetite will keep the Canadian dollar buoyant.

The market may finally be moving out of the dark period when the threat of another bank collapse imperiled the entire credit markets. After nearly six months of consolidation and relative quiet, investors have taken heed of the broad recession that is likely to hold over the global economy through the rest of the year and have come to realize that another crisis will not likely be triggered by a single event. In the absence of fear, market participants once again turn back to the standard for investment – measuring risk versus reward. Looking across the Forex spectrum, it is clear that the Canadian dollar is one of the strongest. Despite facing its first recession since 1992, the world’s eighth largest economy has so far suffered only a modest contraction and shown limited exposure to the credit crisis that has swept over the world. Without doubt, it is a subjective scale to an economies relative strength; but with a benchmark like the US, Canada has a clear barometer. While the US has had to adopt quantitative easing (in addition to its public debt purchases, guarantees and bailouts), Canadian officials have not had to take this step of desperation. Another stark comparison between the two trade partners is the pace of economic data. While data state-side has started to ease of its pace of declines, various areas of the northern neighbor have shown actual improvement. Just a few of the highlights are: a 35,900 increase in jobs last month; a forecast for increased business activity from the Ivey PMI; and a surge in building permits.

However, a smattering of positive indicators does not mean the Canadian economy is already expanding. In fact, in its quarterly policy statement released just a few weeks ago; the Bank of Canada projected a 3 percent slump in economic activity through 2009. Now, loonie data has to consistently outperform its global counterparts, or quickly lose is premium. One glaring issue for Canada heading forward is the warning from BoC Governor Mark Carney that the benchmark lending rate could be kept at 0.25 percent until June of 2010. The returns on various assets is a compilation of factors; but the overnight rate is considered the standard. Data will continue to define Canada’s position in the global race to recovery. There are three notable indicators are on the docket for release this coming week. The housing sector is still a point of weakness for Canada and the home pricing index will give a little more color to a slump that has cut residential sales to their lowest levels in over 12 years. The international merchandise trade report is likely to be the top release for the week as general growth is largely supported by the export sector. An ongoing recovery in this series would support a critical source of income for Canada. – JK