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Market Analysis

Fundamental Analysis: CAD Recovers after Decent Data

June 04, 2019
BY Michael Stark

The Canadian dollar has made some gains so far this week against most major currencies. The key driver was reasonably good data last Friday. For USDCAD specifically, though, weaker American data has been an important factor. Conversely, oil’s losses recently have limited gains for the loonie.

USDCAD has moved down from Friday’s six-month high to trade at around C$1.343 today. The Canadian dollar has also gained somewhat against the yen above ¥80.37. However, EURCAD continued its upward movement today to C$1.512.

Canadian data catalyzing recovery

Last month ended with a number of important releases from Canada. The biggest of these were annual and quarterly GDP growth, which came in basically as expected. On the other hand, monthly GDP at 0.5% and annual PPI at 1.8% beat the forecasts slightly.

Friday’s reasonably positive figures come in the context of recent inflation data. Annual inflation in Canada was 2% in April, exactly in the middle of the Bank of Canada’s target range.

Headwinds from oil and NAFTA

Although CAD has performed somewhat better since yesterday, overall the fundamental picture has been very negative recently. Crude oil has lost over $10 per barrel in the past fortnight, some of the commodity’s worst weekly performances in years. This is a strong factor against the loonie because of Canada’s reliance on exports of oil. American light crude has held slightly below the key area of $53 per barrel so far today.

Trade wars in general are an ongoing risk factor in forex markets, but NAFTA is more specific to CAD and MXN. Donald Trump tweeted last Friday morning GMT that a new 5% tariff would be imposed on Mexico. This news caused a sudden jump for the US dollar against its Canadian and Mexican counterparts. Traders had generally been expecting steps towards a resolution and renegotiation of NAFTA. Now, though, this seems to be less likely.

CAD overshadowed by news elsewhere

Data from abroad has been quite important for many pairs with the Canadian dollar this week. Yesterday featured a number of releases which seem to have given some support. The first was good Chinese PMI, a positive due to Canada’s close trade relationship with China. American ISM PMI yesterday was also very disappointing, the worst release since 2009. This gave some impetus to USDCAD’s pullback.

The main event today in currency markets was the Reserve Bank of Australia’s decision to cut its cash rate to 1.25%. This was almost universally expected, so the announcement did not have a great effect on AUDCAD. However, with the traditionally high-yielding currencies of Oceania both now facing lower rates, the BoC’s 1.75% looks more attractive to carry traders.

Lots of data on Thursday and Friday

Today’s main event is the speech by the Chair of the USA’s Federal Reserve System. Dr Jerome Powell will be giving a talk from 13.45 GMT on monetary policy at the Conference on Monetary Policy Strategy in Chicago. Traders of USDCAD and other symbols besides will study his comments for any hint that rumors of a rate cut in the USA might have some foundation.

Looking further ahead, this is another fairly big week for Canadian data. Arguably the most important release is full-time employment change at 12.30 GMT on Friday. The consensus suggests a slight decline to 62,000. A range of other employment data is also due at the same time, with May’s unemployment rate being the most significant.

Thursday also features some key releases:

  • 12.30 GMT: Balance of trade (April); previous -3.21 billion, consensus -2.9 billion
  • 14.00 GMT: Ivey PMI (May); previous 55.9, consensus 55.5

If accurate, these predictions would probably lead to some instability on Thursday for most pairs with CAD.

Finally and most importantly, Friday’s NFP day. The world’s most important regular economic release is expected to overshadow basically everything else. A summary of analysts’ forecasts indicates a drop of around 60,000 to 175,000. USDCAD in particular is likely to be very volatile on Friday afternoon because both countries release so much data at the same time.

Depending on the news, CAD could extend gains

Given the fundamental picture as of now, it seems possible that the Canadian dollar could strengthen further in most of its pairs over the next couple of days. That said, this is probably dependent on NAFTA news and oil’s performance.

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