Canadian Dollar May Continue To Find Support From Rising Oil Prices

[B][B]Canadian Dollar May Continue to Find Support From Rising Oil Prices[/B][/B]

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

The Canadian Dollar continues to find support despite increasing questions over the pace of a global economy as the USD/CAD sharply fell from 1.1816 to 1.1206 at one point. Oil prices rising above $60 bbl for the first time in six months remains a supportive factor for the “loonie”. The week saw a number of significant fundamental indicators including inflation falling to its lowest level in fourteen years to 0.4% which may raise deflation concerns. However, John Murray, deputy governor of the BOC said in a speech in Philadelphia that “The risks of either a deflationary collapse or an inflationary spiral have been greatly exaggerated.” A report by the central bank showed that they may benefit by lowering their inflation target from the 1-3% range to below 2% as it would provide greater certainty about price levels. The committee is agreed to stay with their current target until the end of 2011. The lack of a threat of increasing price pressures will most likely lead the central bank to leave interest rates unchanged for the remainder of the year. Therefore, the upcoming policy decision could be a non-event as economists are forecasting that the central bank will keep its benchmark rate at a record low 0.25%.

Consumer consumption rose for the third straight month in March and with April’s surprising job growth of 35,000, we could see the trend continue. However, domestic growth isn’t enough to support the export driven economy and this sentiment was echoed by the IMF statement; “The near-term economic outlook will be challenging in light of the sharp deterioration in the global environment and Canada’s strong international linkages.” Indeed, we saw the index of leading indicators fall for the eight consecutive month and the upcoming current account report is expected to report the deficit grew to $10.5 from -$7.5 billion as exports continue to slump. Therefore, we could start to see the limited growth prospects for the economy in the near-term cap future Canadian dollar gains. Considering that the USD/CAD declined 600 pips in the past week a reversal is very likely with a retrace back to 1.1500 or 1.1816 the May 18th high. However, surging oil prices and an improving U.S. economy will help brighten the outlook for the Canadian economy and lead to continued strength for the “loonie” with the USD/CAD looking to test support at 1.1064-the 61.8% Fibo of the 0.9823-1.3065 rally. - JR