Canadian Dollar At Risk Ahead of Bank of Canada, Employment Report
Fundamental Forecast for Canadian Dollar: Bearish
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The Canadian dollar weakened to its lowest level in eight months amid concerns on the slowing growth in the real Canadian economy. According to a report released by Statistics Canada, domestic GDP rose 0.6 percent in fourth quarter, the lowest since second quarter of 2011. On a monthly basis, GDP fell by 0.2 percent in December following a gain of 0.3 percent in previous month. Within the short-term, more elements of the downside risks have materialized than the upside risks, as there is little momentum to drive Canadian economic growth through the foreseeable future.
Looking forward to next week, the Bank of Canada rate decision will likely be the top headline for the Loonie. Although the central bank ultimately needs to withdraw some monetary stimulus, the prospect for rate increase is “less imminent” according to Governor Carney. His remarks could reinforce the increasing popular view that the BOC will leave interest rates unchanged until at least early next year. Thus, the Canadian dollar looks less likely to appreciate as Canada’s benchmark rate remains locked at a record-low of 1 percent.
The pace of economic growth in Canada so far is disappointing as housing starts, factory shipments, exports and retail sales all dropped sharply in December and January. Canada Finance Minister Flaherty said today that he “was not surprised by weak Canada GDP report” and “expected economists to lower growth forecasts” in the near term. On the labor market, the unemployment report due next Friday is expected to show unemployment climbed to 7.1 percent, which adds more negative signs to Canada’s outlook and could push the Loonie to new lows.
A stalemate over the US budget negotiations and the so-called “Sequester” may likewise drag on its northern neighbor as the US remains Canada’s largest trade partner. A total of $85 billion budget cuts will take effect at midnight Friday, which could cause ripple effects throughout the US economy and will lead to 750 thousand jobs lost according to US President Obama. Canada’s export to US can be further damaged if the sequestration is dealt with in a timely manner. This will make the recovery in Canada market much harder. A weaker currency, however, is helpful for domestic firms to gain a competitive advantage in export markets. We doubt that the Bank of Canada will show any concern over the suddenly fast-falling Canadian Dollar exchange rate versus its US namesake. - RM