Its like the argument of the chicken and the egg. A sharp drop advance in crude and other necessary commodities is in turn a hefty burden on growth expectations for an industrial powerhouse like the US; and therefore their prices could be said to be an inverse driver for the greenback.
Canadian Dollar Strength Relying On Oil And Growth
Fundamental Outlook for Canadian Dollar: Bullish
- CPI hits three year high 3.4 percent – reducing speculation of a imminent BoC rate cut
- A sharp rally in crude drives the loonie higher, but its reversal is overlooked by currency traders
Its like the argument of the chicken and the egg. A sharp drop advance in crude and other necessary commodities is in turn a hefty burden on growth expectations for an industrial powerhouse like the US; and therefore their prices could be said to be an inverse driver for the greenback. On the other hand, these goods are priced in US dollars; so a drop in the currency would mean the commodity is thereby more valuable. Regardless of which scenario is correct, both have been beneficial to the Canadian dollar. In fact, when crude rallied more than $5 last Thursday, USDCAD responded by dropping 170 points. However, when the commodity reversed all of its advance and more on the following day, the exchange rate barely moved. This is typically a good sign of market bias as the market is actively looking for reasons to boost the loonie. Looking to the week ahead, continued volatility in raw materials could produce a similar effect but with the hurricane in the US gulf passing and Russia withdrawing from Georgia, volatility should not be expected from this market.
However, in the absence of exogenous event risk, economic data will step in to fill the void. On Thursday, the current account balance is expected to cross the wires with the largest surplus in two-and-a-half years. Strength in trade certainly wouldn’t be a surprise considering the sharp rebound in the goods and services balance and the steady inflow of capital through the investment account. The true market mover will be the GDP numbers. With Statistics Canada releasing its June figure, we will finally get a reading on activity through the second quarter. In this period unemployment has risen (though the impact on spending has yet to drop), housing sales and construction has cooled, business activity has rebounded, and trade has improved. Through all of this the official consensus is calling for 0.5 percent annualized pace of growth, which would avert a recession; but really the outcome for this indicator is up in the air. This makes for an excellent opportunity for volatility and in turn trading opportunities. – JK
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