cad fundamentals

Canadian Dollar Threatened If Risk Appetite Unravels

Saturday, 28 March 2009 06:06:07 GMT  |  Ilya Spivak, Currency Analyst

The Canadian Dollar may reverse lower having rallied strongly over recent weeks if the current rebound in confidence across financial markets proves temporary, giving way to another plunge in risky assets.

Canadian Dollar Threatened If Risk Appetite Unravels

Fundamental Outlook for Canadian Dollar: Bearish

- Leading Indicators Fell More Than Expected in February
- Canadian Dollar Rally Stalls at Trend Line Against USD

The Canadian Dollar may reverse lower having rallied strongly over recent weeks if the current rebound in confidence across financial markets proves temporary, giving way to another plunge in risky assets. There are substantial reasons to suppose that the current upswing is not sustainable. While economic forecasts from central banks, financial institutions and international bodies like the World Bank do not necessarily agree on the minute details of their 2009 growth forecasts, the overall picture is decidedly grim. The International Monetary Fund has been particularly explicit, calling for the worst contraction in global output since World War II. This bodes ill for demand and will almost certainly be reflected in disappointing earnings reports, keeping downward pressure on stock prices and commodities. The upcoming G20 summit in London may push these concerns back into the forefront as all eyes focus on global leaders besieged by the enormity of the task before them. The price of oil is likely to be the most direct conduit of transmission for the Canadian Dollar, with the currency showing a whopping 95.6% correlation with the cost of crude. Technical positioning is supportive, suggesting a return to bullish USDCAD momentum looms ahead.

January’s Gross Domestic Product reading is the only item on interest on the economic calendar. Expectations suggest the economy shrank -0.7%, the fourth consecutive month in negative territory. The down print is likely to underscore that the Bank of Canada remains one of the few major monetary authorities still not done with their easing cycle, adding to downward pressure on the Loonie. Indeed, overnight index swaps call for borrowing costs to be lowered by 25-50 basis points at the next policy meeting on April 21st.

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