Canadian Dollar Eyes Parity with the Dollar as Labor Data Approaches
Heading into the new week, the Canadian dollar will most likely look to any meaningful shifts in risk trends to guide price action. Though Canada’s fundamental picture did improve markedly over the past week, the momentum the currency enjoyed was certainly leveraged by a rebound in sentiment. And, though there is very little yield to be found in differentials where the loonie is the carry currency; it nonetheless maintains its correlation to its Aussie and kiwi counterparts through its commodity connection. At the same time, the lack of meaningful return to be found from the unit will expose it to reversals as it does not have the firepower to back up its recent strength. Alternatively, a steady climb in risk trends could find the combination of a hawkish policy, robust recovery and commodity appeal a fundamental sail for strength. In fact, assessing the fundamental strength of this currency, the market is pricing in a little more than 100 basis points worth of policy tightening over the coming 12 months (according to the Credit Suisse overnight index swaps). This notably puts the BoC ahead of all of its major counterparts aside from the RBNZ.
It is difficult to tell whether the fundamental data will contribute to a prevailing sentiment trend (like it did last week) or detract from it. Regardless, there is considerable scheduled event risk over the coming days. Without doubt, the top market mover is Friday’s labor statistics. Forecasts are calling for a 16,000-person net increase in payrolls that leaves the jobless rate unchanged at 8.3 percent. Overall this would support a general improvement in employment conditions; but it would not be difficult to rouse optimism from the crowd through larger than expected increase in the payroll figure or a downtick in the percentage of unemployed. Yet, a lot can happen before Friday; and for that reason, the housing and trade data could play a bigger role in developing a trend that develops earlier in the week. February housing starts are expected to rise to a 190,000 annual pace of activity (a 15-month high) while the edge modestly back above the surplus line. This data is notable; but its real market moving potential rests with its ability to match risk appetite. - JK
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