[B]Canadian Dollar Vulnerable to Retracement as Correlations Change[/B]
</p> [B]Fundamental Forecast for Canadian Dollar: [/B][B]Neutral[/B]
- Canadian economy lost 44,500 jobs in July, which was triple estimates
- Ivey PMI fell to 51.8 from 58.2, which was weaker than estimates if 54.0
The Canadian dollar rally came to an this past week after it gained nearly 1000 pips against the dollar as the USD/CAD set a fresh yearly low of 1.0632. Weak fundamental data from Canada combined with strong employment figures from the U.S. led to a sharp reversal to end the week pushing the pair back above the 1.0800 price level. The Canadian economy lost 44,500 jobs in July which was triple expectations. The goods producing companies led the drop with 29,800 which is disappointing considering the improvement in the global economy. It appears weak demand from the U.S. is continuing to weigh on activity which may continue until strong consumer consumption returns. BoC governor Carney has forecasted that growth will return for the economy by the end of the year but unemployment will continue to rise. However, we didn’t see that this month as it stayed at an 11 year high of 8.6% as the labor force shrank by 53,500 as Canadians gave up pursuing employment in the face of dim prospects. This could weigh on domestic growth prospects going forward which could limit the scope of a recovery. More important to a Canadian recovery may be the US labor picture which improved as unemployment actually fell in July to 9.4% from 9.5% as the pace of job losses slowed to -247K from -348K. The weakness in the manufacturing sector was evident in the Ivey PMI reading which fell more than expected to 51.8 versus 54.0. Last month saw a surge to 58.2 from 48.4 as companies looked to rebuild inventories after months of operating at extremely lean levels. However, the pull back signals that growth may be hard to come by going forward.
The upcoming economic docket doesn’t present the level of event risk that we saw the past week as only housing starts, manufacturing sales, and the international merchandise trade report are due for release. All three release are June measurements and the backward looking data may not have a bearing on price action. Housing starts has the most implications for future growth but the Canadian housing sector isn’t as critical to the recovery of the economy as in the U.S. and should garner little focus. A sharp improvement in manufacturing sales could generate some bullish “loonie” sentiment as it would raise the prospects for the sector but given the weakness that we saw from the July indicators it could be overlooked. The main driver of price action this week could be dollar sentiment as the greenback has found support on the back of the US labor report. Given the sharp drop in the USD/CAD in the prior month we should at least see a natural retracement with the 38.2% Fibo of the recent “loonie” rally at 1.1041 as a likely target. The 20-day SMA at 1.0949 could provide resistance for the pair. Potential exists to 1.1200-the 50-Day SMA, but if we see the greenback return to its correlation with risk sentiment then the yearly lows could be re-tested.