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Loonie Correction Finished, Headed Lower Against Buck

Loonie Correction Finished, Headed Lower Against Buck

2011-10-07 22:31:00
Christopher Vecchio, CFA, Sr. Currency Strategist
Share:
Loonie_Correction_Finished_Headed_Lower_Against_Buck_body_Picture_5.png, Loonie Correction Finished, Headed Lower Against Buck

Fundamental Forecast for Canadian Dollar: Bearish

After being the worst performing currency for two straight weeks, the rally back to risk-correlated assets late on Tuesday lifted the Canadian Dollar for the remainder of the week, despite downside pressure late Friday. The Canadian Dollar finished up 1.04 percent against the U.S. Dollar, and was the third best performing major on the week, just behind the other commodity currencies, the Australian Dollar and the New Zealand Dollar.

The Loonie’s support on Friday came two ways: a better-than-expected Canadian labor market reading; then a better-than-expected American labor market reading. Easing concerns of a U.S. recession lightened the pressure on the Loonie, given the currency’s connection to the U.S. economy. Canada is the largest exporter of oil to the United States. Accordingly, when growth prospects improve for the United States, as they did today with the better-than-expected NFP data, the Loonie finds higher demand.

Looking ahead to data this coming week, it appears that the only market moving event directly out of Canada will be housing sector data on Tuesday. The Canadian housing sector has remained strong in the face of global pressures, and its performance is particularly impressive when compared to the recovery – or lack thereof – occurring in the United States. Housing starts are forecasted to have jumped to 189.5K in September, up from a revised 184.6K print in August. The print would help the housing sector resume its trend that had been in place since May: housing starts have been above 189.0K all but once since then.

As I noted last week, and I will continue to hold going forward, “regardless of the data, the Canadian Dollar, as a risk-correlated asset, being bid higher when market participants seek higher yield, stands to lose in the periods ahead.” But for Tuesday’s rally, the Canadian Dollar would be much lower across the board. With the correction having completed, another leg higher is fully expected, in particular on a fundamental basis. Similarly, as data out of Canada is sparse to start the quarter, the bias remains that “any rallies should be sold as broader global trends dictate the need for safety, in currencies such as the Japanese Yen or U.S. Dollar.” – CV

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.

Follow me on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com.

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