Canadian Dollar Outlook Turns Bearish

Fundamental Forecast for Canadian Dollar: Bearish

- Canadian Dollar Focus is on 200 Day Average

- Canadian Dollar Forecast to Strengthen

The Canadian Dollar had a modestly strong week, climbing 1.1 percent against the U.S. Dollar, though it lagged the other commodity currencies. Its commodity comrades, the Australian and New Zealand Dollars, gained 1.63 percent and 2.18 percent, respectively. The Loonie was supported by a slightly firmer crude oil, which was up 1.63 percent on the week. The trend is clear: without the support of broader markets, there was little reason for the Canadian Dollar to gain against the U.S. Dollar.

Data this past week was bullish for the Canadian Dollar, but only marginally. Leading indicators expanded by 0.8 percent in December, a tenth of a percentage less than November’s positively revised figure. Retail sales for November were better than expected, though the growth was less than the prior reading. Thus, in both cases, the data was positive, just not as good as the prior month; is this a sign that the Canadian economy is facing some headwinds? Only time will tell, though.

Looking ahead, the event docket features two considerable data prints that will stoke volatility across Loonie-based pairs during the first week of February. On Wednesday, monthly growth figures are due, with the November GDP reading forecasted to show a slight 0.2 percent bump. On a year-over-year basis, growth is expected to have declined to a modest 2.3 percent pace. Considering that Canada is the number one exporter of oil to the United States, and now that the United States is a net exporter of oil, the Canadian economy might see a slowdown in this respect.

Volatility is likely to be high as well on Friday, when the monthly Canadian labor market reading is due. The Canadian labor market is forecasted to have improved slightly in January, adding 22.0K jobs, up from the 21.7K jobs added in December. The net effect is expected to be minimal, with the unemployment rate forecasted to hold at 7.5 percent, according to a Bloomberg News survey.

If there is one thing to take away from this piece, note the rhetoric employed: not much exciting data is due, and there is nothing substantial neither in the rear view mirror nor on the road ahead to keep the Canadian Dollar from depreciating against the U.S. Dollar. Without the further support of global risk trends, the coming week could be rough for the Loonie. –CV