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Canadian Dollar’s Optimism Is Less And Less Based In Fundamentals

Fundamental Outlook for Canadian Dollar: Bearish

- Canada reports more job losses than expected, sending the unemployment rate to its highest level since August 2003
- The Canadian dollar hits a four-and-a-half year low against the dollar after housing starts drop 12 percent
- Vital export sector looks to push recession further in 2009 as January trade balance hits a record low

The Canadian dollar has picked up from more-than four year lows that the currency tested against the greenback early last week; but bulls haven’t been able to make a case for a genuine reversal just yet. While policy officials and many investors have predicted the Canadian dollar to weather the global financial and economic storm better than the US and many of its other global counterparts, it is far too early to deem the loonie secure. As market participants the world over become experts on recession and stimulus efforts, they will become particularly critical of the best performing economies – and Canada easily tops that list.

There will be two major themes driving price action in the coming week. Focusing on trend rather than short-term volatility, the broader health of the financial sector and the government’s efforts to prevent a deeper economic slump will put Canada on the scale as its trade partners. At this point in the game, the global recession is engrained in the trader psyche. The IMF has forecasted the first contraction for the global economy since WWII. Under such conditions, investors are not immediately looking for returns; rather security now with the potential for returns later down the line. Canada still fits the bill for safety of funds and potential for return; though this sentiment is quickly degrading. Just two weeks ago, the fourth quarter GDP number marked the worst slump in nearly 19 years. What’s more, the timely, monthly data that has crossed the wires suggests this was just the beginning of a more serious recessionary trend (putting Canada in the same position as many of its global counterparts). Employment data for February reported yet another significant loss in consumer purchasing power with the jobless rate hitting its highest level since 2003. Investment activity is on similarly weak footing with housing and business plunging through the opening months of the year. And, the long-term backstop for domestic shortfalls – demand for exports have plunged sending the trade balance into a record deficit. Recently, Finance Minister Jim Flaherty forecasted a modest 0.8 percent contraction for 2009. Given the data that is opening the year, this seems optimistic.

The docket will offer another round of market-moving data in the days ahead. However, this time, they may have more than just the usual, short-term impact on price action. The key numbers will be the manufacturing shipments, retail sales, consumer inflation and international transactions reports. The consumer spending and factory output figures (along with the already released trade deficit) will offer a good benchmark for the forthcoming January GDP reading. Poor readings here will leverage fear of a recession that hits US levels as the year wears on. And, with the Finance Minister suggesting the C$20 billion in stimulus the Canadian government plans on using to prop up the economy may take some time to distribute; timing is running out for heading off a more severe recession.  – JK