Fundamental Forecast for Canadian Dollar: Bullish

The Canadian dollar was the only major currency that pushed higher against the greenback last week, climbing some 0.27 percent. The rally in the loonie may continue into next week’s trade as fundamental and technical developments as of late call for additional strength in the currency. As the economic docket during the upcoming week will be fairly muted, market participants should not rule out the recent strength in the CAD to continue its course against the greenback as increased uncertainty in the world’s largest economy remains.

During this past week, employment in Canada rose 22.0K in December after climbing 15.2K the month prior amid economists’ forecasts of 20.0K. At the same time, the unemployment rate remained unchanged at 7.6 percent. It is worth noting that the employment change marks the strongest pace of growth since August. Taking a look at the breakdown of the report, full time employment jumped 38.0K, while part time employment slid 16.1K. The reading bodes well for Canada as it represents continued labor force expansion. Indeed, youth employment provided a large contribution to the employment change. Looking ahead, the recent jobs number is not expected to change incredible amount; thus, the Bank of Canada will unlikely hike rates at its January 18th rate decision. This assumption coincides with market expectations as traders are pricing in an a mere 8 percent chance that the BoC will raise its key overnight lending rate twenty five basis points at its next meeting. Looking ahead, next week the economic calendar in Canada will be fairly muted, with housing starts serving as the only notable event.

Crude oil prices are expected to remain at their elevated levels, which is Lonnie positive due to the fact that Canada holds the second largest oil reserves in the world. With the energy commodity finding support at the 50-day moving average, I do not rule out a reversal during next week’s session. At the same time, traders should closely monitor the developments in the world’s largest economy because the U.S. is Canada’s largest trading partner. Following the dismal nonfarm payrolls report last week, the dollar remains at the crossroads and may face some selling pressure next week as the economic outlook remains uncertain. Employment rose a mere 103K in December amid economists’ predictions of 150K. Following the impressive ADP employment report, the highly anticipated NFP report failed to add color to the bleak labor force picture. Going forward, the unemployment rate may remain around its current levels as Fed Chairman Ben Bernanke said that it may take 4 – 5 years for the job market to “normalize.” All in all, the Canadian dollar is likely to continue its northbound quest against the greenback as fundamental developments favor the loonie.

Taking a look at price action, the USDCAD remains capped by the 10-day moving average. At the same time the MACD has yet to reverse course after signaling for losses December 27th, while our speculative sentiment index stands at 6.7, providing the contrarian signal to remain short.

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