After an exceptionally volatile period for the currency market, the Canadian dollar came through as a significant loser this past week. Culled sentiment was clearly a factor with the Japanese yen appreciating an astonishing 4.38 percent against the loonie; but that wasn’t the full story. A critical look shows us that the currency actually closed the week lower against all its major counterparts (including follow commodity bloc members Australian and New Zealand dollar). While fundamental traders should keep track of risk appetite and the commodity correlation going forward; there are more provoking concerns building under the surface that could spark a trend in the otherwise anchored USDCAD sooner rather than later.
Canadian Dollar Under Pressure as Sentiment Sours, Intervention Mulled
Fundamental Forecast for Canadian Dollar: Bearish
- Canada runs its longest trade deficit since 1975
- Canadian dollar revives its correlation to crude just when risk appetite shot higher
- Has USDCAD made its last gasp bear wave before a major reversal takes hold?
After an exceptionally volatile period for the currency market, the Canadian dollar came through as a significant loser this past week. Culled sentiment was clearly a factor with the Japanese yen appreciating an astonishing 4.38 percent against the loonie; but that wasn’t the full story. A critical look shows us that the currency actually closed the week lower against all its major counterparts (including follow commodity bloc members Australian and New Zealand dollar). While fundamental traders should keep track of risk appetite and the commodity correlation going forward; there are more provoking concerns building under the surface that could spark a trend in the otherwise anchored USDCAD sooner rather than later.
For immediate impact, no other probable event (though it is certainly a low probability occurrence) would have the market-moving influence that an announcement of FX intervention could exact. This may seem an extreme move outside the realm of economic reality; but talk of just such a measure has grown louder over the past few months. And, for those skeptical that such a move could be made, the BoC states on its website that the central bank “may intervene in the foreign exchange markets on behalf of the federal government to counter disruptive short-term movements in the Canadian dollar.” The government made voiced its concern just this past week when Finance Minister Jim Flaherty said there are “indications of speculation in the Canadian currency that is not justified in market terms.” So far, this is just ‘jawboning;’ but the threat’s impression on the market may have its intended effect without actual action from BoC Governor Mark Carney. Many believe that policy officials are not likely to pursue such an aggressive course of action as it could end up being ineffectual in such a deep market. However, if they do indeed believe it is artificially inflated through speculation; all they have to do is undermine traders confidence – and something so fickle can give way easily under the right conditions.
On the topic of speculation, the premium built into the loonie through a perceived sense that the economy could recovery more quickly than its major trade partners (especially its primary counterpart – the US) already seems to be in jeopardy as data erodes forecasts. Now with the US on the verge of turning a positive growth reading, Canada is expected to match or best its neighbor. However, monthly data to this point has shown a 10th monthly contraction and a 3.5 percent contraction in the year through May (the worst performance since 1982). Looking ahead to the August 31st release of the June and second quarter data; prospects for a positive quarter are certainly diminished as unemployment rises, manufacturing contracts and foreign demand is even further strained by protectionist efforts.
As for data over the coming week, most of the indicators are considered secondary. International securities transactions is considered lesser capital inflow; wholesale sales are overlooked as the market waits for the retail data; and the Leading Indicators composite index struggles to offer an early warning on the direction and intensity for the change of growth. A more unique reading though is the CPI data. This is an indicator that has come back into vogue recently – not as a gauge for yield forecasts – but as a means for gauging the economic influence of inflation. If a serious problem of deflation should develop, the central bank could find itself in trouble with few options left to it beyond quantitative easing. Alternatively, a rebound in price pressures without growth to support it makes for an economic whirlpool referred to as stagflation. - JK
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at [email protected]
