The Canadian dollar rose to a fresh trend high against the greenback, driven by higher oil prices paired with the rise in market sentiment, and the commodity currency may continue to advance over the following week as traders raise their appetite for higher risk/reward investments.
[B]Canadian Dollar May Weaken Further as Trade Conditions Deteriorate[/B]
[B]Fundamental Forecast for Canadian Dollar: [/B][B]Bearish[/B]
- Bank of Canada holds interest rate steady at the record-low
- Canadian labor market falters, with unemployment rising to an 11-year high
- Canadian growth rate falls 5.4% in first-quarter
The Canadian dollar rose to a fresh trend high against the greenback, driven by higher oil prices paired with the rise in market sentiment, and the commodity currency may continue to advance over the following week as traders raise their appetite for higher risk/reward investments. At the same time, the Bank of Canada held the benchmark interest rate at the record-low of 0.25%, but warned that the appreciation in the exchange could “fully offset” the improvements in the economy as the loonie strength “reflects a combination of higher commodity prices and generalized weakness in the U.S. currency.’ The comments suggests that the sharp spikes in the exchange rate could hamper the outlook for future policy, and the BoC may take additional steps over the medium-term to shore up the economy as growth prospects deteriorate.
Moreover, the central bank explicitly stated that they will continue to hold borrowing costs at its current level into the following year, and went onto say that the board still has the “flexibility” to utilize tools beyond the interest rate if economic conditions continue to deteriorate. A report by Statistics Canada showed a deepening downturn in the labor market, with the unemployment rate jumping to an 11-year high, and fears of a deepening downturn could lead the central bank to adopt unconventional tools to stimulate the ailing economy as the outlook for growth and inflation falter. In addition, the GDP report showed the economy marked its biggest contraction since 1991, driven by a downturn in exports, and businesses may continue to scale back on production and employment over the medium-term as global trade conditions falter.
Meanwhile, the USD/CAD slipped to 1.0790 earlier this week, which is the lowest since October 2008, and the pair may retrace the sharp decline in the week ahead as the economic docket is expected to reinforce a dour outlook for future growth. The trade surplus is expected to fall lower in April as the U.S., Canada’s biggest trading partner, faces its worst economic downturn in over half a century, while new home prices are expected to fall another 0.5% during the same period. However, a rebound in housing starts could encourage an enhanced outlook for the world’s eighth largest economy, and further improvement in market sentiment may continue to drive the loonie higher as investors raise their appetite for risky assets. - DS