cad fundamentals

Canadian Dollar Forecasts Remain Gloomy on Shaky Fundamentals

Friday, 12 December 2008 23:37:25 GMT  |  David Rodriguez, Quantitative Analyst

A larger-than-expected Bank of Canada interest rate cut made the Canadian Dollar one of the worst performing G10 currencies on the week, but an outright tumble in the US Dollar left the USD/CAD marginally lower through Friday’s close. BoC officials surprised markets in lowering interest rates by a sizeable 75 basis points—signaling that domestic yields will likely fall harder than previously expected. Dismal economic data out of the US economy likewise dimmed Canadian economic outlook, and the Loonie continues to lose ground against major global counterparts on worsening fundamentals.

Fundamental Outlook for Canadian Dollar: Bearish

-   Canadian Dollar tumbles on Bank of Canada interest rate cut
-   DailyFX Analysts express theirviews on the Canadian Dollar

Forecasts for further deterioration in Canadian economic conditions will likely keep pressure on the Canadian dollar through the foreseeable future. Whether or not it is able to recover against the US dollar is another matter entirely, however; similarly gloomy outlook for the US economy leaves its currency in a similarly disadvantaged position. Short-term price action in the USD/CAD currency pair may subsequently depend on the trajectory in Crude Oil prices; the 50-day correlation between the USD/CAD and oil prices currently trades at its strongest levels in at least 10 years.

The Canadian economic calendar is otherwise unlikely to spark major moves in the USD/CAD, but traders should watch out for any surprises surrounding the highly-anticipated US Federal Reserve interest rate decision. The US central bank is expected cut interest rates to fresh record-lows in Tuesday announcement; the key question is how low rates can and will go. The ramifications of the rate decision will almost certainly be felt in all US dollar pairs and, importantly for the USD/CAD, in Crude Oil prices. It is difficult to predict how the Canadian dollar will react, but we expect significant volatility out of all US dollar-denominated forex pairs through the week’s price action. - DR

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