Fundamental Forecast for Canadian Dollar: Bullish

The Canadian dollar continue its trend of strength against its currency neighbor to the south, closing the week at 0.9451, its lowest close on the year against the U.S. dollar. While data this week out of Canada generated bearish tones against the Loonie – the Bank of Canada held rates as expected, while Canadian GDP actually underperformed expectations – the general trend of Greenback weakness across the board helped prop up the Loonie. As such, with price pressures starting to rise in Canada, while Bank of Canada policymakers are reluctant to raise interest rates as Loonie strength has helped maintain consumers’ purchasing power, in an effort to hold interest rate yield differentials at steady levels, a rate hike may be in the future. As such, with rising rate hike expectations, our bias remains in favor of the Loonie, with a general bearish outlook on the USD/CAD pair.

Given the trend of USD/CAD pair weakness over the past several weeks and months, with little fundamental data on the docket that could harm the pair’s march, further gains are expected by the Loonie on a fundamental basis. There are only a handful of significant events on the calendar for Canada, though they are likely to further prop up the Loonie heading late into the week. On Thursday, the Ivey Purchasing Managers Index for April is due, and is expected to dip slightly as a stronger Loonie has weighted on exporters ability to appeal to customers abroad. The index, which registered at 73.2 in March, is forecasted at 65.1, though a reading over 50.0 still indicates expansion – in this case, growth is expected at a slightly slower rate. The key data for Canada comes out on Friday, however.

The labor market is expected to have continued the long-term trend of job growth in April, after having lost 1.5K jobs in March. Initialy forecasts show that economists’ expect that 20.0K jobs were added to the economy in April. Although last month’s reading disappointed the market, the underpinnings of the data gave the report a silver lining: while 92.1K part-time jobs were lost, 90.6 full-time jobs were added. Accordingly, another month along the growth path boosts an already robust Canadian economy, the only one that has regained all of its jobs since the recession.

The data next week could in turn boost rate hike expectations for the Bank of Canada, which have remained subdued for some time, with 91.0-basis points priced in for the next 12-months, up from 56.5-basis points priced in on March 21. Accordingly, as the spread in expected interest rate yields increases between the U.S. dollar and the Canadian dollar, further Loonie strength is likely on the horizon.

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