Fundamental Forecast for Canadian Dollar: Bearish

- The Canadian economy cools while BoC Governor Carney espouses caution on further rate hikes
- Consistent chop may not last long for the frequently volatile and directionless USDCAD cross

The Canadian dollar isn’t the current it once was. Just a few months ago, the loonie would instinctively follow the high-yield Australian currency with equivalent fervor. However, recently, the positive risk bearing has been curbed by the Bank of Canada’s dovish tone and their downgrade in growth expectations. This means the Canadian unit cannot simply ride the coattails of risk appetite trends without the promise of higher returns down the road to back it up. And yet, the same currency is still holding up relatively well. Against the US dollar, the implications for strength are pretty blatant in the form of an excessively weak counterpart. And yet, even here, we see that the greenback has maintained its tumble against the euro, while USDCAD has paced the past few weeks virtually unmoved. Is the Canadian dollar positioning for a meaningful deflation in fundamental strength?

In establishing the future of the Canadian dollar, we already know the general direction that speculators’ expectations is taking. Having only occurred recently, the BoC’s warnings that rate hikes aren’t in the books for the immediate future and that growth will be far more anemic than many expect; there is still a fundamental gap between the value that officials are suggesting and the prevailing market price. There can certainly be a cross flow to come from sustained weakness for US assets as the proximity and low regulation hurdles for moving capital over the boarder will make Canada a natural destination. However, avoiding a dependency on the US dollar to assess the bearing of the Canadian currency; we have plenty of event risk to interpret over the week.

The docket is backloaded going forward. Activity will begin on Wednesday with the release of the Canadian Ivey PMI reading for September. A business activity report, this is an important measure of domestic health while simultaneously keeping a finger on the pulse of foreign demand. A sharp pullback is expected after the previous reading hit a two-year high. The following day, building permits will represent a second tier release; but a disappointing figure will exacerbate festering concerns. Friday is the main event. The net change in employment is the top release without doubt. The country has only reported a net loss in jobs once in the past eight month; so this data will have some linger bullish expectations attached to it (not a good thing for a disappointing outcome). What’s more, the change in permanent positions and jobless rate will be important. The labor data isn’t the only data due Friday. There is growing uncertainty surrounding the housing market; so September housing starts will be a closely regarded report. And, if we were talking about true fundamental influence, the third quarter BoC senior loan officer survey and business outlook reports represent top risk. Both are essential to growth going forward; and lending figures will offer a critical and quantifiable assessment of the nation’s financial health.

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