Fundamental Forecast for Canadian Dollar: Bullish

The Canadian dollar advanced against the greenback this week, climbing some 0.77 percent on the back of U.S. dollar weakness and concerns of quantitative easing measures in the world’s largest economy. With the outlook for crude oil looking extremely bullish in the near term despite nearing overbought levels, the loonie is poised to strengthen further against the greenback this week as affects from Friday’s U.S. nonfarm payrolls trickle over into next week’s trade.

Indeed, Canada is the seventh largest producer of crude oil in the world, with its oil sand production continuing its northern journey. Thus, the rise in the energy commodity bodes well for the economy. As of late, oil is gaining momentum on the back of a tumbling dollar due to the fact that oil is price in dollars, and is therefore more attractive than the single currency. It is also worth noting that the U.S. dollar may continue its southern journey as QE concerns linger. At the same time, the dollar index has fallen for four consecutive days and continues to trade in a descending channel that has remained intact since the beginning of September. Until we see a break above this range, downside risks remain for the dollar, while crude oil should see further gains, which is indicative of advances in the Canadian dollar.

Taking a look at the economic docket from Canada this past week, we saw that the Ivey PMI report for the month of September topped expectations, climbing to 70.3 from 65.9 in August. However, the employment report initially added weight onto the loonie as the labor force fell 6.6K, while the unemployment rate fell to 8.0 percent from 8.1 percent in August as some workers left the workforce. Taking a closer look at the report, full time workers jumped 37.1K, whilst part time workers dropped 43.7K. Therefore, the release bodes well for Canada as companies look to retain talent. For this upcoming week, there are not many market moving events from the region. Traders will face the international merchandise trade, manufacturing sales, and new motor vehicle sales. The latter in particular should be not overlooked as vehicle sales provide a good insight into consumer spending. Market participants should also keep a close eye on the developments from the world’s largest economy due to the face that the U.S. is Canada’s largest trading partner. On tap from the states are the FOMC, advance retail sales, inflation, and the U. of Michigan confidence report. Any dovish comments or further disappointing data will fuel concerns of QE and add additional weight onto the greenback.

In the currency markets, the USDCAD remains capped by the 20-day moving average, while the MACD remains below the signal line, and has yet to crossover to the upside. So long as price action can hold below 1.02, downside risks remain. One pair in particular that I have been keeping a close eye on is the AUDCAD. Last week, the pair reached parity for the first time since May 2004, and has since than tested that level two more times, but failed to close above this level. With the RSI in overbought levels, the pair looks poised to correct to the downside. Furthermore, the MACD has crossed over to the downside, signaling for a possible decline in the near term.

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