Canadian Dollar Strength Could Evaporate Should Labor Data Stumble

The Canadian dollar has exhibited tremendous strength this past week, brought on by the Bank of Canada’s hesitation to adopt quantitative easing and a notable cooling in nation’s recession. However, will this advance last?


Canadian Dollar Strength Could Evaporate Should Labor Data Stumble

Fundamental Outlook for Canadian Dollar: Bearish

The Canadian dollar has exhibited tremendous strength this past week, brought on by the Bank of Canada’s hesitation to adopt quantitative easing and a notable cooling in nation’s recession. However, will this advance last? In the currency market, the strength and weakness are relative. So, traders will have to decide whether the loonie is indeed weathering the global economic slowdown and struggle to thaw financial markets better than its counterpart. Clearly, speculation is still offering its vote of confidence behind the single currency; but it is prudent to heed the warnings of policy officials. Dour forecasts from the central bank and government gives rise to doubt; but active market participants remain skeptical. Perhaps a round of the economy’s top even risk due over the next few days will merge the outlooks behind these two divergent camps.

Without question, the top event risk over the coming week is Friday’s labor report. The Bloomberg consensus is calling for a net 50,000 jobs to have been lost over the month of April. This would mark the sixth consecutive decline in national employment and is further expected to push the jobless rate to a more than 10-year high 8.3 percent. Such speculation is well-founded considering the state of the economy and the forecasts from policy makers. Canada is on track to establish its first official recession (two consecutive quarters of contraction) since 1991. Even the Bank of Canada - who is supposed to be the cheerleader for its forecasts can become a sell-fullfilling prophecy to some degree – has projected the worse. After projecting a 3.0 percent contraction in real GDP through 2009 and ongoing deterioration in credit conditions, the future seems to have dimmed. However, there is still room for surprise – especially with the market obviously willing to buy the currency despite its disappointing prospects. Should the decline in net employment be closer to zero (or less likely but infinitely more market-moving, positive), it would fit into the theme that the pace of economic deterioration is slowing. If that is the case with Canada, the country is in a far-better position to mount a quick and aggressive recovery than many of its counterparts.

Ignoring the gravity of the labor data, there are other indicators on and off the Canadian docket that should be accounted for when developing a rounded forecast for the loonie. First and foremost, the US NFPs (also due on Friday and likely curbing much of the volatility that USDCAD would develop after a notable Canadian report) will have a profound impact on its neighbor to the north. Looking beyond the obvious implications of the exchange rate between the two, we also have the export demand factor that is tied to the employment reading. While the US employment rate is hardly the end-all-be-all for economic activity in that country; it is perhaps the best leading indicator for growth. As such, as the jobless rate in America rises, demand for Canadian goods from its consumers, business and investors drops. As the destination for approximately 80 percent of Canada’s exported goods, this impact should not be overlooked.

Back at home, the rest of the docket will fall to interest in business activity and the housing sector. The Ivey PMI is expected to drop back, though not to retest its recent record low set back in January. As for the housing sector, the plunge into recession is still fresh and certainly not as severe as its US counterpart. Forecasts for a 2.3 percent drop in housing starts and a modest improvement in building permits following a 7 year low certainly open the potential for surprise. – JK

Written by: John Kicklighter, Currency Strategist for DailyFX.com.
Questions? Comments? You can send them to John at <[email protected]>.