cad news

Weekly Outlook: Loonie Run Fails Without Oil Momentum

Friday, 29 September 2006 23:56:50 GMT  |  John Kicklighter, Junior Currency Analyst

A backended economic calendar last week left the Canadian currency with few fundamental injections of volatility, but where headline-making indicators bowed out, commodity action was quick to fill the void.  However, even with the a few indicators and ever-present spot energy and metals prices, the range bound nature of the USDCAD has held out as the pair closes into the weekend at the same rate where it began.

Looking ahead to next week, the docket is once again loaded towards the end of the week.  The first scheduled indicator does not come into play until Thursday’s building permits over the month of August.  Bookings for construction currently has a consensus of a 0.5 percent increase attached to it, but looking to historical trends, this is unrealistically conservative for a read that often sees double digit changes.  For the month, the best indicator for the future change comes on the part of the previously released, housing starts report for the same period.  Though covering only a portion of the total permits group, the sharp drop in residential starts to an October low could reveal a greater underlying trend.  Further helping out predictions for such a drift are the continually high lending rates and recent reductions in demand for Canadian exports, both reducing the ability and need for firms to expand their factory space.  Also due out that same day, is the Ivey Purchasing Managers’ Index.   A reliable read on business activity and a well-known market mover, the September Ivey number is expected to rebound off its seven-month lows.  While consumer spending trends haven’t picked up to much in the past month, the large drop in input prices should help encourage greater firm investment.  Then, rounding out the weekend rather abruptly are Friday’s employment reports.  While Canadian’s payroll numbers will be somewhat overshadowed by the concurrent release of the US non-farm payrolls, it will likely be the more interesting on a fundamental basis.  As US job reports have leveled off just above 100,000 over the past few months, the Canadian numbers have contracted for three consecutive months.  The last time such a statistic was recorded by Statistics Canada was back in 1992.  Should a net addition to the national employment level be realized and end the recent declines, a relief rally could evolve in the Canadian unit.  On the other hand, should a expectations be broken and more employees be laid off, serious concerns over the future of the consumer sector and the economy as a whole could bubble to the surface and send the loonie plunging.  While these indicators will attract a lot of fundamental attention towards the week’s end, day traders will still need to find the basis behind their trades in the data absent days.  For those time when scheduled releases are not on deck, commodities will once again take control.  With crude oil prices just recently bouncing off of recent lows near $60 per barrel, participants in many different markets will focus in to see how the volatile liquid will effect their asset days, weeks and months down the road.

Compared to the forthcoming data, last week’s numbers were less attention grabbing.  Though offering up reports covering inflation and economic growth, two of the more important topics among fundamental traders, their place on the hierarchy of indicators and time worthiness was questionable.  Looking back to price action in the day’s before the releases filtered into the market, the Canadian dollar was actually plowing ahead through notable resistance levels.  From the slow open of the week, a high in the USDCAD was established quickly around 1.1190.  Though not covering much distance, the loonie was slowly pushing out its US counterpart.  By Wednesday, when crude prices jumped back above the $62.50 mark, a surge in loonie bids was able to drive the USDCAD down through 1.1125.  However, during the following days, the initial move in energy couldn’t muster a decent follow through, so price action was left in the hands of the few indicators available for the week.  On Thursday, inflation was the theme of the session with industrial product and raw material price indices printing for the month of August.  The bill for produces for raw materials was already expected to contract modestly for the month as energy prices fell on commodity exchanges.  In fact, the gauge actually dropped 3.5 percent for the biggest one month decline since December of 2004.  As was predicted, mineral fuels led the way with a 5.2 percent plunge while a 4.0 percent contraction in vegetable prices was not inconsequential.  Further down the chain, factory prices in turn dropped 0.5 percent.  A strong currency weighed on vehicle prices, cutting the average price in the group 0.7 percent; and cheaper energy bills helped to push electrical down 0.2 percent.  While both of the indicators were disappointing, they were not necessarily market moving as the consumer index had already desensitized the market to woes.  Even though its importance was played down, it effectively stopped the loonie advance in its tracks as a 1.1085 floor was put in place for the USDCAD.  On Friday, the final piece of data for the week was not bad, but at the same time was not motivating. According to Statistics Canada, the Canadian economy expanded 0.2 percent in July.  The rebound in growth was largely due to a 1.0 percent jump in wholesale activity and 0.4 percent jump in the financial industry.  However, the market discounted the indicator immediately as the actual release only met expectations and the read itself was already several months old.  Aside from this though, the most pessimistic feelings toward this indicator resided in expectations for the following month when commodity started to tumble and a reliance on domestic demand was looking feeble.  By the close of the week, the loonie managed to retrace its advances and actually closed slightly below were its started at 1.1182 against the US dollar.

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