The Canadian Dollar was the second-best performing currency against the U.S. dollar this week as the loonie continued to benefit from higher commodity prices paired with the rise in market sentiment, and may advance over the following week as investors forecast oil prices to hold above $50 a barrel.
Canadian Dollar Could Prevail as Market Sentiment Improves
Fundamental Outlook for Canadian Dollar: Neutral
- Business spending unexpectedly falls further in March
- Employment falls another 61.3K in March, jobless rate surged to eight-year high of 8.0%
- Market sentiment improves despite the weakening outlook for the global economy
The Canadian Dollar was the second-best performing currency against the U.S. dollar this week as the loonie continued to benefit from higher commodity prices paired with the rise in market sentiment, and may advance over the following week as investors forecast oil prices to hold above $50 a barrel. Nevertheless, as trade conditions falter, the economic docket for the following week could reinforce a weakening outlook for the export-driven economy as the U.S., Canada’s biggest trading partner, faces its worst recession in over a quarter century. Meanwhile, Finance Minister Jim Flaherty said that he saw ‘some small signs of little process’ during an interview with BNN television earlier this week, which spurred hopes for a recovery this year however, a report by Statistics Canada showed that the labor market weakened more than expected, while the Ivey PMI reading unexpectedly fell for the fifth consecutive month in March, and the data continues to foreshadow a weakening outlook for growth and inflation as businesses cut back on production and employment in an effort to reduce costs.
Manufacturing shipments are anticipated to increase 3.3% from a 10-year low of C$41.7B, while the headline reading for inflation is projected to hold steady at 1.4%, and despite the positive forecasts held by economists, a drop in the CPI paired with lower demands for Canadian goods could weigh on the exchange rate as the Bank of Canada expects the world’s eighth-largest economy to contract more than it had initially expected in January. As a result, the central bank said that ‘the overnight rate can be expected to remain at this level or lower,’ which left the door open for another rate cut at the April 21 policy meeting, and policymakers are likely to slash their growth forecasts later this month as the downturn in the global economy intensifies. Moreover, as the BoC maintains a 2% target for price growth, rising risks for deflation could encourage the central bank to take unprecedented steps to raise the money supply as the region faces its first recession in over a decade, and expectations for further action by the central bank is likely to spur bearish sentiment for the loonie as Governor Mark Carney drops his reluctance to utilize tools beyond the interest rate to manage monetary policy. As a result, if the economic calendar foreshadows a weakening outlook for growth and inflation, a shift in market sentiment should lead the USD/CAD higher, and we may see the pair advance over the following week to push back above the 100-Day SMA at 1.2403 however, if the data crosses the wires in-line with forecasts, long-term expectations for higher interest rates could boost the appeal of the Canadian dollar as investors raise their appetite for higher-yielding assets. - DS
