Fundamental Forecast for Canadian Dollar: Neutral

The Canadian dollar maintained its strength through this past week, but it would struggle to establish bullish progress outside of its connection to the greenback. Considering the US currency was one of the weakest performers through the period, this doesn’t present a good assessment of the loonie’s fundamental bearings heading into the new trading week. Looking at the fundamental positioning of the currency, it is difficult to establish a foundation for significant gains or losses. Nonetheless, we will keep an eye on scheduled event risk, risk appetite trends and interest rate expectations to gauge not only the direction but intensity of the currency’s bearings going forward.

Underlying sentiment trends are by-far the greatest contributor to the Canadian dollar’s strength to this point. Through risk appetite, the market looks to seek out the greatest source of value through individual currencies; and that leads us to the loonie’s position in the commodity bloc. Natural resources as an asset class have offered one of the best performances across the capital markets; and the demand for the attractive returns has directed the excess speculative funds in the US across the board into Canada. That is the foundation of the often-quoted correlation between the USDCAD and crude prices.

A side effect of risk appetite for the Canadian dollar is the extension of its membership in the comm bloc to raise its profile as a potential high-yielding currency. In reality, the currency’s benchmark yield is only 1.00 percent; but the 12 month outlook is pricing in a hearty 91 basis points of additional tightening. That is second only to the ECB – which has profited handsomely thanks to the outlook for its yield. Is such a forecast warranted or is it just a side effect of risk appetite and the prominence of raw material prices? We will soon find out. On the calendar this week, we have the BoC’s rate decision and later their monetary policy statement. Currently, index swaps are pricing in a mere 4 percent probability of a hike at this meeting; so there are limited expectations there. Yet, with the statement, we will receive growth and inflation updates as well as insight into policy officials’ approach.

As it happens, the BoC’s policy backdrop looks much more like the BoE than the ECB. While there is fundamental evidence to support a potential near-term move; the central bank has actively played down the risk to its primary mandates. It is difficult to say what would merge expectations to policy standings; but fundamentals can actually catch up to speculation in this case (that isn’t a common scenario). In other news, the trade figures, manufacturing sales data and new housing price index for February should offer a meaningful view of economic health. Though, don’t expect this data to jump start any major trends.

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