cad fundamentals

Canadian Dollar May Break Support On BoC Rate Cut

Saturday, 06 December 2008 04:13:55 GMT  |  John Rivera, Currency Analyst

The Canadian Dollar would steadily fall throughout the week as weak fundamental data and declining commodity prices lowered growth expectations for the economy. Weak domestic data had a significant hand in the currency’s fall as manufacturing activity fell to its lowest level on record on the back of plunging inventory and prices.

 

Canadian Dollar May Break Support On BoC Rate Cut

Fundamental Outlook for Canadian Dollar: Bearish

-   3Q growth in Canada rose 1.3%, as the economy remained resilient despite falling commodity prices
-   The Ivey PMI gauge fell to 40.2 from 52.2, which was the worst since record keeping began in 1997
-   Canadian employment declined by 71,000 in November, which was the biggest fall since 1982

The Canadian Dollar would steadily fall throughout the week as weak fundamental data and declining commodity prices lowered growth expectations for the economy. Weak domestic data had a significant hand in the currency’s fall as manufacturing activity fell to its lowest level on record on the back of plunging inventory and prices. The Canadian economy would also give back the most jobs since 1982 which was almost triple expectations with both manufacturing and service sectors losing over 35,000 jobs each. Additionally, the unemployment rate rose to a two year high of 6.3% despite the fact that over 48,000 people left the workforce. The “loonie “ may remain under pressure as the economy could grind to a halt if domestic demand follows falling exports. 

A BoC rate decision will dominate event risk next week with the MPC expected to cut rates by 50 bps down to 1.75%. However, given the sharp falls in employment and manufacturing we could see a more aggressive more by Governor Carney. Yet, in a November speech in London the MPC leader noted the fact that Canadian banks have not sought public capital and that the banking system has been unscathed compared to other countries and are continuing to provide loans. If  Canadian consumers and business continue to have access to funding the economy may be able to rebound sooner than expected from the current downturn. However, the Canadian economy is reliant on exports to the U.S. and demand for raw materials which have both plummeted, the International Merchandise trade balance is expected to see its surplus fall to 3.2 billion from 4.5 billion in October. Therefore, if we see the USD/CAD break above resistance at 1.300 it may look to test 1.3500. However, a hawkish Carney and an expected 50 bps cut could spark bullish “loonie” sentiment and see price action fall back to the 20 Day SMA at 1.2420 which has held as support the past three weeks. - JR

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