Canadian Dollar Yield Potential Surges as its Risk Profile Narrows
As a general assessment, the influence that strong economic and financial health has in valuing a currency cannot be overestimated. The Australian dollar is a good example of the added value that can be established through this fundamental strength; and the recent performance of the British pound reveals what can result in the absence of such support. Where does Canada stand? The economy managed a short-lived recession of its own and the outlook is quite robust. What’s more, through the turmoil of the past three years, Canada would suffer no bank failures or domestic financial crises of its own. For the future, though, the real payoff for strength is would be found in actual rate hikes (the income of the FX market). On this front, there are few that trump Canada. Only the RBNZ is expected to outpace the BoC over the coming 12 months with the latter expected to lift its benchmark 129 basis points over that period. What’s more, the likelihood that the policy authority will get the jump on its counterparts is high. Adding a truly hawkish facet to growth and financial health, inflation data this past week showed the annual reading for the core CPI number rose above the bank’s 2.0 percent target rate for the first time in 14 months.
Looking at the week ahead, the probability of event-driven volatility is relatively low. The only notable release expected is the leading indicators composite index for February. As a gauge of growth over the coming three to six months, this is a ‘big scope’ indicator that has supported the outlook for a robust recovery. However, the market-moving influence this data holds is tepid at best. Instead, the more probable driver of price action will be risk appetite itself. The currency has proven itself to have a clear, positive correlation to investor sentiment. And, as for speculative optimism, the markets have established a consistent but lacking advance over the past month-and-a-half. A risk in speculative positioning is not unjustified given the relative stability of underlying risk appetite; but the many threats to calm that have developed in recent months makes this a dubious period calm. If indeed, speculative capital has been built up to such a degree, another modest shock to the system could leverage a dramatic unwinding. I believe such an outcome highly probable in the near future; and that is the only reason I have assigned a bearing outlook for a currency that is otherwise rock solid. - JK
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.