cad fundamentals

Canadian Dollar Strength Relying On Oil And Growth

Friday, 29 August 2008 23:32:08 GMT  |  David Song, Currency Analyst

Hurricane Gustav, which is expected to hit the gulf coast over the weekend, has propped oil futures above $118 during Friday’s trading session, and may spur bullish sentiment for the Canadian dollar if crude oil prices continue to climb. After peaking to 1.0726 earlier in the month, the USDCAD has held within a tight range between 1.0605 and 1.0410.  and may fall back below 1.0400 if crude prices rise above $120.

 

Canadian Dollar Strength Relying On Oil And Growth

Fundamental Outlook for Canadian Dollar: Bullish

- Second quarter GDP Fails to meet expectations, heightening growth risks
- A sharp rally in crude may trigger a breakout for the USDCAD

Hurricane Gustav, which is expected to hit the gulf coast over the weekend, has propped oil futures above $118 during Friday’s trading session, and may spur bullish sentiment for the Canadian dollar if crude oil prices continue to climb. After peaking to 1.0726 earlier in the month, the USDCAD has held within a tight range between 1.0605 and 1.0410.  and may fall back below 1.0400 if crude prices rise above $120.

The Bank of Canada rate decision on Wednesday holds the biggest potential to trigger increased volatility for the USDCAD. A Bloomberg News poll showed that economists are expecting the BoC to hold the benchmark interest rate steady at 3.00%. In contrast, interest rate swaps are showing that market participants have already raised bets that the central bank will lower the benchmark interest rate over the next 12 months. However, despite these predictions for easing, consumer price inflation rose to a five year high of 3.4% in July, which is well above the central bank’s 2% target. Meanwhile, second quarter GDP failed to meet expectations, rising only to 0.3% from a revised reading of -0.8% in the previous quarter. As the Canadian economy faces rising inflation paired with slowing growth,  the central bank could be force to hold a neutral policy stance going forward.

Finally, Friday’s top event risk may also shake up volatility for the USDCAD with payrolls expected to grow by 5.0K following the 55.2K contraction in July. A rise in employment would further induce bullish sentiment for the loonie as downside growth risks subside while upside inflation risks remain high. The Ivey PMI to follow could have some market moving potential as market participants expect the index to fall lower to 62.0 from 65.5, but may fail to move the markets if employment data marks its own volatility. - DS

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