A weaker than expected Storm Gustav would weaken the loonie as oil prices plummeted. The BoC keeping their benchmark rate unchanged would trigger a sharp rise in the Canadian Dollar as it gain over 150bpos. The USDCAD would ultimately fall over 20 bps from 1.0778 to support near 1.0550. Although a better than expected labor report would provide “loonie” support, a weaker than expected Ivey PMI would ultimately send it lower.
Canadian Dollar May Fall On Global Growth Concerns
Fundamental Outlook for Canadian Dollar: Bearish
- The BoC Left Its Benchmark Rate Unchanged At 3%, stating that it was “appropriately accommodative”.
- Canadian Employment Unexpectedly rose by 15,200, As Companies Hired More Permanent Workers
- The Ivey PMI Reading Fell to 51.5, the lowest since December as business spending slowed
A weaker than expected Storm Gustav would weaken the loonie as oil prices plummeted. The BoC keeping their benchmark rate unchanged would trigger a sharp rise in the Canadian Dollar as it gain over 150bpos. The USDCAD would ultimately fall over 20 bps from 1.0778 to support near 1.0550. Although a better than expected labor report would provide “loonie” support, a weaker than expected Ivey PMI would ultimately send it lower.
The BoC was clear in its statements that the current benchmark rate was “appropriately accommodative”, that a rate hike was not forthcoming in the near term. The lower interest rate outlook may suppress the Canadian Dollar going forward. Additionally, the drop in business spending to 51.5 from 65.5 is further proof that the economy still has significant hurdles ahead before the central bank would consider a tightening bias. Meanwhile, the global economic slowdown will continue to weigh on demand for commodities, eliminating the main growth area for the economy. As long as prices for crude and precious metals continues to decline, “loonie” sentiment may remain bearish.
The economic calendar for the upcoming week doesn’t present the level of event risk of the past week as housing and trade data are on tap. An uptick in housing starts could generate some short term bullish sentiment as it reminds traders that the Canadian housing market remains in far better shape than their neighbor to the south, which could lead to a faster recovery for the economy. Ultimately, Thursday International merchandise trade report will be the major indicator to watch, as the anticipated decline may highlight the dependence of the Canadian on U.S. demand. A drop in exports will demonstrate that a Canadian recovery hinges on the its main trading partner’s recovery. The next level of resistance for the USDCAD will be at the 1.08 price level. We could see the pair become range bound between 1.08 and 1.06 which has held as firm support. There is plenty of upside if there is a break above 1.08 and with 1.04 serving as another significant support level, a long USDCAD position could be the less risky bet in the long-term. - JR
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