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Little Data out of Canada but Fundamentals Continue to Strengthen

Little Data out of Canada but Fundamentals Continue to Strengthen

2012-04-07 00:39:00
Christopher Vecchio, CFA, Senior Strategist
Little_Data_out_of_Canada_but_Fundamentals_Continue_to_Strengthen_body_Picture_5.png, Little Data out of Canada but Fundamentals Continue to StrengthenLittle_Data_out_of_Canada_but_Fundamentals_Continue_to_Strengthen_body_Picture_6.png, Little Data out of Canada but Fundamentals Continue to Strengthen

Fundamental Forecast for Canadian Dollar: Bullish

The Canadian Dollar had a strong week despite only posting a 0.12 percent against the U.S. Dollar; the Loonie’s strength was evident elsewhere, in particular against the Euro in which it appreciated by 2.05 percent against. The bulk of the Canadian Dollar’s move came on Thursday following an exceptionally strong labor market reading; and in general, the Canadian economy continues to look like a stalwart amid the slow erosion of major developed economies.

Looking ahead, there’s not by way of the economic docket, although data released on Wednesday could be enough to continue the Canadian Dollar’s recent bull-run. Housing starts for March are forecasted to improve slightly, up to 202.0K from 201.1K. While this is not necessarily a substantial improvement, relative to a year ago, the reading is very strong. In fact, over the past five months (October 2011 through February 2012) the Canadian economy has seen a housing starts reading of 199.42K on average; over the same period last year, housing starts averaged 176.56K. A reading above the forecast and the above recent trend averages should yield another strong move by the Loonie.

Considering that’s all of the Canadian marketing moving data for the next week, a brief discussion of longer-term fundamental trends is warranted to give credence to the notion that the Canadian economy is improving and that the Loonie could be primed for a move higher as we head towards the second half of the year. Over the past three months the Canadian economy has seen its unemployment rate drop from 7.6 percent to 7.2 percent. Similarly, while the Canadian economy added 190K jobs in 2011, it has added 81.8K thus far in 2012 – so in just the first quarter of the year, we’ve already witnessed approximately 43 percent of 2011’s labor market growth.

The inflation outlook in Canada is heating up as well, with the year-over-year consumer price index readings trending higher and holding above the Bank of Canada’s target of 2.0 percent. Should impending headline growth data improve alongside the labor market, the BoC would have to consider raising its key interest rate from its current level at 1.00 percent. The continued trend of strengthening Canadian fundamentals could result in a higher yield backing the Loonie and we would expect the currency to appreciate accordingly. But for global growth headwinds, the Canadian Dollar is primed for a strong week next week. – CV

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