Sharp gains in oil prices led the Canadian dollar to fresh 7-month highs against its downtrodden US namesake, making the Loonie the second-best performer among G10 currencies on the week’s trade. NYMEX Crude Oil prices posted its biggest monthly gain since 1999 on sharp US Dollar tumbles, and short-term momentum clearly favors further strength.
[B]Canadian Dollar Surge May Slow on Critical Economic Event Risk[/B]
[B]Fundamental Forecast for Canadian Dollar: [/B][B]Bearish[/B]
- Canadian retail sales Rose 0.3% in March as gains in food and supermarket sales outpaced declining gasoline receipts.
- The annual inflation rate dropped to 0.4%, which was the lowest level in more than fourteen years.
- Canada’s index of leading indicators fell by 1.1%, which was the eight consecutive month the outlook for the economy declined
Sharp gains in oil prices led the Canadian dollar to fresh 7-month highs against its downtrodden US namesake, making the Loonie the second-best performer among G10 currencies on the week’s trade. NYMEX Crude Oil prices posted its biggest monthly gain since 1999 on sharp US Dollar tumbles, and short-term momentum clearly favors further strength. Given the fact that the Canadian dollar’s correlation to crude oil prices stands at its strongest since at least 1986, the commodity price rally clearly favors further USDCAD losses. Canadian economic news had comparatively little effect on the domestic currency, and it will be far more important to watch the upcoming week’s critical pieces of fundamental event risk.
The coming days bring an important number of Canadian economic data releases, but the general trajectory for the Canadian Dollar may still depend on trends in oil prices. First on the ledger, analysts predict Statistics Canada will report that domestic Gross Domestic Product contracted at the fastest annualized pace in the survey’s 47-year history. Such massive economic headwinds hardly bode well for the domestic currency, and indeed we would expect that any negative surprises could easily force Canadian Dollar losses. The following Thursday’s calendar is similarly significant, and traders are especially anxious to listen for any unexpected rhetoric following the Bank of Canada’s rate decision.
The BoC made it plainly obvious that target interest rates would remain stuck at 0.25 percent for a long period of time, but it may nonetheless prove important to listen to official commentary following the rate announcement. The bank’s last statement said that members remain open to Quantitative Easing measures if conditions warrant, but it’s interesting to note that domestic prices have not fallen as hard as economic contraction rates would imply. The Bank of Canada Core Consumer Price Index actually registered an elevated 1.8 percent annual growth rate through April—hardly a sign of deflation. Given such a backdrop, we believe it is very unlikely that the Canadian central bank follows in the aggressive steps taken by the US Federal Reserve. In fact, we would watch for any hints that the central bank is now concerned over the risks of a rise in domestic inflation expectations.
The busy week of economic event risk will likewise bring highly market-moving US and Canadian employment figures through Friday morning’s trade. After a hugely surprising yet misleading gain in Canadian Employment levels through the month of April, analysts predict that domestic payrolls fell by 45,000 in May. We would hardly argue with such bearish forecasts—especially given downright gloomy expectations for GDP figures. As always, any truly noteworthy surprises will most likely bring commensurate moves in the Canadian Dollar. - DR