cad fundamentals

Canadian Dollar Threatened as Traders Boost Interest Rate Cut Expectations

Saturday, 07 February 2009 01:15:09 GMT  |  Ilya Spivak, Currency Analyst

The Canadian Dollar could see downward pressure in the coming week as evidence of deepening recession boosts expectations of deeper interest rate cuts.

Canadian Dollar Threatened as Traders Boost Interest Rate Cut Expectations

Fundamental Outlook for Canadian Dollar: Bearish

- Ivey Purchasing Managers’ Index Shows Business Confidence at Record Low
- Economy Sheds 129 Thousand Jobs, Largest Loss In Over 30 Years

The Canadian Dollar could see downward pressure in the coming week as evidence of deepening recession boosts expectations of deeper interest rate cuts. The trade surplus is expected to narrow to a meager C$0.5 billion in December, the smallest in over 16 years, as tepid US demand and falling oil prices deflate export volumes. Canada counts on the US to absorb close to 80% of all its outbound shipments, so the downturn in the world’s largest consumer market has been especially pronounced for Canadian producers. Meanwhile, the price of oil shed another 18.3% through December. The Bank of Canada forecasts that withering export demand will trim 2.6% from GDP, with overall output shrinking -1.2% in 2009. Elsewhere on the docket, Housing Starts are set to rise just 169.3k, the weakest in over 7 years, while the New Housing Price Index shrinks for the third consecutive month, shedding another -0.3%. The heavy dollop of red ink comes on the heels of a record drop in business confidence and the biggest monthly job loss since records began in 1976, fueling speculation that policymakers will have to gear up substantially more stimulus in the weeks and months ahead. Indeed, overnight index swaps show priced-in interest rate cut expectations added a whopping 73% from last week, with traders now betting on over 50 basis points in easing over the next 12 months. The fallout is already materializing: the Loonie diverged sharply from the rest of the commodity dollar bloc, ending the past week just 0.84% against the greenback whereas NZDUSD and AUDUSD rose 4.48% and 5.93%, respectively.

Technical positioning further supports Canadian Dollar weakness: a narrowing consolidation range originating from late October has seen USDCAD form a Pennant chart pattern. This is typically indicative of continuation, and the broader trend has been convincingly bullish since the pair broke above multi-year resistance at a trend line connecting major highs from May 2004. Current positioning sees prices stalling above the 1.21 and we expect renewed bullish momentum to push USDCAD higher for another test of the triple top at 1.30.

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