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Canadian Dollar Hits 11-yr Low vs. USD on Wholesales Trade Data Miss & Macro Factors

Canadian Dollar Hits 11-yr Low vs. USD on Wholesales Trade Data Miss & Macro Factors

Tyler Yell, CMT, Currency Strategist


Fundamental Forecast for CAD: Bearish

The Canadian Dollar is definitively the weakest currency within the G10 as pressures mount on the Bank of Canada to potentially ease again. Oil is causing further pressure on the economy and another January rate hike may be in the cards should the price of Oil, which the Canadian economy relies heavily upon, fall below the 2008 intraday low of $32.40. That fear, along with the market’s favor of the US Dollar after Wednesday’s FOMC decision to raise rates and project four hikes in 2016 cased The Canadian dollar to fall to C$1.40 per US Dollar for the first time since 2004.

Inflation in Canada has been rather steady even though economists’ expectations proved too optimistic on Friday. Canada CPI rose to 1.4% Y/y in Nov. vs. Est. 1.5%. Aside from the CPI data, Canadian Wholesale Sales fell 0.6% m/m vs. est. 0.1%. Both the CPI & Wholesales trade data miss pushed USD/CAD to 1.4001, which was also 2004 high. Next week, the data schedule will be expectedly light. We have Retail Sales & GDP on Monday. GDP looks to improve from the September print of -0.5% to market expectations of +0.2%, and retail sales look similarly for improvement from the September read of -0.5% to +0.5%. A miss on these data points, especially GDP, could continue to put further downward pressure on the Canadian Dollar.

The government bond market is also worth focusing on when looking at the value of the Canadian Dollar. In short, the spread between two-year government yields in US & Canada continue to widen. There has been a significantly positive correlation historically between widening government yield spreads, and strong currency pair moves and USDCAD toward 1.4001 is no exception. The current spread displayed below is ~-48bps. You would get the spread if you were to buy the Canadian 2yr Government Notes, and sell United States 2yr Notes and take the difference between the two yields. In this example, the US spread is +48 bps. Should the spread continue to widen, the CAD could continue to weaken. Unfortunately, we've seen traders fight this move aggressively per our Trading Sentiment Tool, SSI. This fight has been costly, but the message here is that strong moves with multiple forces should not be fought.

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