Fundamental Forecast for Canadian Dollar: Bearish

A rapidly rebuilding correlation between the Canadian dollar and underlying risk sentiment bodes ill for the currency as Friday’s underwhelming US jobs report threatens to rekindle broad-based risk aversion. Indeed, USDCAD now shoes an inverse link of -0.67 with the MSCI World Stock Index, the highest in six weeks, on 20-day percent change correlation studies.

The figures out of the US produced a mildly positive reaction, with shares finishing higher on Wall Street in its aftermath as investors opted to focus on the drop in the unemployment rate (down to 9 percent) rather than the disappointing increase in payrolls (36k versus 146k expected). Optimism may quickly dissipate however as it becomes apparent that the decline owed to an exodus of discouraged workers from the labor force rather than any kind of improvement. Indeed, the labor force participation rate dropped to the lowest since March 1984. If the lackluster outcome for the world’s top economy – long the bellwether for global growth at large – unleashes another round of broad-based risk aversion, the Loonie could fall quickly out of favor having been the only currency to gain against the greenback in the aftermath of US jobs data as Canada’s own employment report surprised to the upside.

In fact, the Canadian unit is arguably more vulnerable than other risk-linked currencies considering its sensitivity to the US business cycle goes beyond its implications for risk trends and speaks directly to underlying fundamentals. Canada sends over 80 percent of its exports to its southern neighbor, making the health of the US labor market – and thereby that of the US consumer – a key ingredient in the country’s own performance. Taken against the backdrop of a thin homegrown economic calendar, a corrective unwinding of robust US growth expectations built up over recent weeks ought to find it relatively easy to overtake the spotlight, pushing USDCAD higher toward the psychologically critical parity level once again.

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