Will the Canadian economy weather the global recession better than its G10 counterparts? Will the central bank holds the nation’s benchmark lending rate up to provide a yield advantage to the loonie when the risk appetite returns? These are the questions that speculators will be asking and that event risk may help to answer in the week ahead. With an otherwise limited number of scheduled releases due, the Canadian dollar is looking at a significant threat to volatility and perhaps the catalyst for the next major trend.
Canadian Dollar Finally Taken to Task for Interest Rates and Growth
Fundamental Outlook for Canadian Dollar: Bearish
- Growth may be weaker than speculators may expect after retail sales reportedly plunged the most since 1991
- The broadest measure of trade plunges to its worst deficit in 15 years through the fourth quarter
Will the Canadian economy weather the global recession better than its G10 counterparts? Will the central bank holds the nation’s benchmark lending rate up to provide a yield advantage to the loonie when the risk appetite returns? These are the questions that speculators will be asking and that event risk may help to answer in the week ahead. With an otherwise limited number of scheduled releases due, the Canadian dollar is looking at a significant threat to volatility and perhaps the catalyst for the next major trend.
For a global market place that is plagued with economic and financial crisis, the primary concern in trading any currency is the potential for growth. Since the global recession and market crisis really started to accelerate last fall, there has been an aura of optimism around the Canadian economy. Despite the economy’s heavy fundamental ties the battered the United States, growth would hold up relatively well – imbuing Canada with a sense of strength and stability that was severely lacking everywhere else in the world. If its economy could indeed hold up better (not necessarily having to produce positive results) than say the US, UK, Euro Zone and other industrialized powerhouses; then Canada and its currency would be considered a market leader. However, this impression of fundamental strength is slipping away quickly. Back in January, the Bank of Canada said its quarterly monetary policy report that Canada was already in recession and the economy would contract 1.2 percent through 2009. Data will look to confirm this dour assessment on Monday with the release of the fourth quarter, annualized GDP numbers. Even before the turn of the year, economists suspect the world’s eighth largest economy shrunk 3.6 percent – what would be the worst plunge in nearly 18 years and a pace to rival any of the other global leaders.
Eventually, growth will stabilize. This will likely come as an extended period of uneven decelerating contractions and slow recoveries among the world’s industrialized nations. And, when expansion is a viable forecast, investors will once again seek return on their capital (rather than merely hunkering down in a safe haven). Which economy can recovery quickest and most aggressively will no doubt attractive the world’s capital flows. However, the starting point for yields will be just as important as how quickly they can rise. As such, a kiwi dollar that is has a benchmark rate around say 2.50-3.00 percent will experience an aggressive rally against a currency that sees rates near zero like the yen. Currently the loonie falls right in the middle of this spectrum at 1.00 percent; but that may change quickly with the Bank of Canada rate decision on Tuesday. The economist consensus from Bloomberg is projecting a 50 basis point cut that puts the policy group well within range for matching the Fed with a symbolic zero target rate when before the recovery ever starts. Historically, the BoC is comparatively slow to adjust rates (especially around economic cycle turns); so this move could severely handicap the currency in the weeks and months ahead. - JK
