Canadian Dollar to Decline if Stock, Oil Prices Extend Losses

The Canadian Dollar may reverse recent gains in the week ahead as stock and oil prices show signs that risky assets are set to reverse lower after rallying sharply since early March.

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[B]Canadian Dollar to Decline if Stock, Oil Prices Extend Losses[/B][/B]

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

The Canadian Dollar may reverse recent gains in the week ahead as stock and oil prices show signs that risky assets are set to reverse lower after rallying sharply since early March. An index of the currencies average value against a trade-weighted basket of top currencies is now 94.1% correlated with the MSCI World Stock Index and 89.3% correlated with the price of crude oil (based on a 180-day rolling correlation study). This suggests that any fallout in risk appetite is likely to drag the Canadian unit along for the ride, particularly against safety-linked currencies like the US Dollar and the Japanese Yen. Technical positioning is supportive, with the MSCI measure showing signs of a forming double top at the swing high from early January while crude oil is bouncing lower after a test of resistance marked by the top of Rising Wedge chart formation, a setup typically indicative of a downward reversal. Turning specifically to USDCAD, we previously noted that the pair was testing support-turned-resistance at 1.1754 following a bounce from the bottom of a falling channel chart pattern. This hurdle has now been overcome, with prices now likely to move higher to challenge the channel’s top above the 1.20 level.

Turning to the economic calendar, the upcoming round of fundamental releases could substantially compound downward pressure on the Canadian Dollar. April’s Consumer Price Index headlines the data docket, with expectations calling for the annual pace of inflation to decline to just 0.6%, the slowest in over 14 years. On the same day, the Leading Indicators metric is expected to decline for the 7th consecutive month in April, signaling the economy is likely to continue to contract in the medium term. A survey of economists conducted by Bloomberg suggests the economy will shrink by a hefty -2.5% in 2009. The week’s event risk concludes with the March Retail Sales report, with expectations calling for receipts to have grown 0.5% versus 0.2% in the preceding month. Although this will mark the third consecutive monthly gain after a shocking -5.0% drop in December, the news is not as encouraging as the headline figure would suggest: in annual terms, retail activity has been contracting at an average pace of -5.7% over the past three months; in level terms, sales now stand at the lowest in 2 years. Looking past month-to-month percent change volatility and considering the prevailing outlooks for growth and employment, spending is likely to remain subdued for some time. Indeed, the jobless rate has printed at a 7-year high at 8% for the past two months and is expected to average about 9% through 2010.