The Canadian dollar posted the most aggressive advance against the benchmark greenback this past week (4.3 percent) even though domestic data was decidedly mixed and the USDCAD’s correlation to risk trends is comparatively minor. On the other hand, after nearly a month of tight congestion - with a notable bias in the dollar’s favor – a breakout was inevitable.
[B]Canadian Dollar Surge May Not Find a Supportive Bank of Canada[/B]
[B]Fundamental Forecast for Canadian Dollar: [/B][B]Bearish[/B]
- Inflation shrank at its fastest pace since 1955, but not when you exclude gas prices
- BoC surveys show the best prospects for business sales in a decade, but worst credit conditions in two years
- Canadian dollar proves far more volatile than its usual crude driver
The Canadian dollar posted the most aggressive advance against the benchmark greenback this past week (4.3 percent) even though domestic data was decidedly mixed and the USDCAD’s correlation to risk trends is comparatively minor. On the other hand, after nearly a month of tight congestion - with a notable bias in the dollar’s favor – a breakout was inevitable. And, considering the buildup of positive fundamental pressure over the past few weeks with better than expected readings in areas like employment, housing starts and business activity; it was greenback’s ill-gotten appreciation was looking overdone. Now, heading into a new week nearly 500 points lower, we have to consider whether the commodity currency’s push has in turn been overdone. With an active earnings week and a round of significant event risk, fundamentals could prove more of a burden than a boon for the loonie.
With volatility as a guide, the most likely fundamental driver for USDCAD over the coming week is the combination of earnings and questionable stability of the financial sector. In sync with the US, Canada’s earnings season picks up next week with reports from EnCana, Suncor and Canadian National Railway among others. These reports will have the specific effect of gauging the health the nation’s business sector as they balance uncertain domestic and foreign demand. Earnings from the US will certainly have its own impact on the Canadian currency. Aside from revealing demand for Canadian exports from the country’s largest trade partner; state-side accounting figures will define the market’s risk profile. Last week, a few better-than-expected figures from key blue chip companies sparked a global rally in risk appetite and subsequently catalyzed the USDCAD’s breakout. If numbers from here on out aren’t as impressive Goldman Sachs or Intel this past week, the commodity currencies could reverse along with sentiment.
Another dynamic that could be borne from the market is the health of the financial sector. Heading into the close of the week, US commercial lender CIT was heading towards bankruptcy as a $1 billion debt was coming due and the Treasury said it was unwilling to extend the firm a second bailout (suggesting the policy authority deemed its potential failure not a system risk). This plays into the international securities transactions report due Monday morning; but will a disruption in the US financial markets mean capital flight to Canada? Unlikely. In fact, if this or any other major institution threatens collapse, liquidity will be sought after in US Treasuries – which are abundant after record rounds of sales to fund ever-growing deficits.
Back with the boarders of Canada, loonie traders will find a few notable economic drivers to derive volatility from. The second quarter GDP release is still a long ways off (the monthly reading for May is due at the end of this month); but speculators are nonetheless interested in the nation’s pace of recovery – especially in comparison to its US counterpart. As such, retail sales will provide a key measure of domestic demand and activity. However, the volatile month-to-month changes in this report will likely offer limited, immediate impact for price action. The Bank of Canada, though, may stir up a little more action. The central bank will announce its policy decision on Tuesday. Governor Carney has said just this past month that Canada’s recession has become as deep as its US neighbors and household debt was a ballooning problem; so while a change in rates is unlikely, a shift towards unorthodox policy is possible. Beyond that, not much is likely to be said about forecasts as the group’s monetary policy report is due on Thursday. The quarter gauge of economic and financial trends will ground fundamental traders with reasonable benchmarks for speculation. – JK
[I]Questions? Comments? Send them to John at <[email protected]>.[/I]