Canadian Dollar Slips on First Canadian Trade Deficit in 32 Years

Fundamental Outlook for Canadian Dollar: Bearish

- Canada produces its first trade deficit since 1976
- Housing starts unsurprisingly fall further through housing recession
- (From last week) Economy Sheds 129 Thousand Jobs, The Largest Loss In Over 30 Years

Canada’s first trade deficit in over 30 years helped pushed the domestic currency lower against its US namesake, while sharp drops in Crude Oil prices likewise added downward pressure on the commodity price-sensitive currency. Fundamental sentiment for the Canadian Dollar certainly took a hit through the week’s developments; Canada remains the most trade-dependent country in our G10 currency universe, and a sharp deterioration in external demand for Canadian production bodes poorly for domestic industry.

Traders will now turn their attention to the coming week’s key string of economic reports. Consensus forecasts call for further deterioration in important Manufacturing Shipments data, while Wholesale Sales and CPI figures are likewise predicted to fall. The manufacturing report is rarely market-moving, but the health of Canadian industry remains of paramount significance to broader economic growth. We will keep a close eye on the results, but the highlight of the week will likely come on Friday’s highly-anticipated Consumer Price Index results.

Interest rate traders predict that the Bank of Canada will cut interest rates by at least 50 basis points at their March 3 meeting, but such forecasts could shift on a surprise in CPI data. The Bank of Canada targets a 2.0 percent inflation rate on their preferred measure of core prices. Markets will clearly watch for any surprises around this figure, but current forecasts of a 2.2 percent year-over-year print arguably dampen expectations for aggressive rate cuts. Currency markets have proven largely indifferent to interest rate differentials, but we would argue that a significant deterioration in CAD yields could force further losses in the recently downtrodden currency. Otherwise, it will be especially important to watch the trajectory of commodity prices—especially as the USD/CAD-Commodities correlation trades at its highest levels in at least 10 years. - DR