Fundamental Forecast for Canadian Dollar: Neutral
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The Canadian Dollar had a mediocre week, finishing in the middle of the pack among the majors, while losing -0.53% to the US Dollar, in what was a mostly risk-averse past five days. Despite only falling modestly against the US Dollar, the Loonie’s gains against the other majors wasn’t that superb, with the Canadian Dollar only gaining +0.76% against the worst performing New Zealand Dollar. Meanwhile, on the flipside, the Loonie dropped against the top Japanese Yen by -1.71%.
Data out of Canada was light this past week, but of note: October Housing Starts dropped to a pace of +204.1K from +225.2K in September, below the expected clip of +210.0K. The housing sector has been in the eyes of Bank of Canada hawks the past few months, to the extent that Governor Mark Carney has even publicly discussed a rate hike in the near-future. Perhaps this is just a moderation; perhaps this is the beginning of something much worse. In either case, we believe that, despite solid fundamentals elsewhere, the growing ‘risk-off’ tone to the market alongside diminished rate expectations will keep the Canadian Dollar on neutral ground for the week ahead.
In terms of the coming five days, there’s only one data point in focus: the Existing Home Sales report for October on Thursday. While there’s no forecast provided, the line in the sand comes in at +2.5% month-over-month, considering that was September’s reading. Needless to say, given the concerns around the housing market recently, this is a print worth paying attention to.
Mainly, however, we are focused on the shifting interest rate environment behind the Canadian Dollar, which in my opinion has underpinned Loonie weakness. According to the Credit Suisse Overnight Index Swaps, investors are pricing in a 0.0% chance of a 25.0-basis point rate hike at the next meeting – despite the hawkish commentary from Governor Carney – and there aren’t any basis points being priced in over the next 12-months, either.
Canadian government bonds have seen their yields weaken (higher price) in recent weeks, falling back to levels unseen since late-July. This is no coincidence – this is when the Euro, the magnet of all things bad in Europe re: the sovereign debt crisis, fell to its yearly low as the Spanish debt crisis accelerated. Likewise, the Canadian Dollar and the S&P 500 set their summer lows in the last week of July as well. If Canadian government bond yields continue to weaken, the Canadian Dollar could see further weakness.
When considering the weekly fundamental forecast for the Euro, with a light data picture accompanying the Canadian Dollar, we are forced into a neutral forecast for the coming week. We’re curious to see if Governor Carney and the BoC sharpen their tone about inflationary pressures in the economy (as reflected by the housing sector, not headline CPI figures), as market participants have remained unconvinced thus far. Accordingly, if Canadian yields increase and the BoC is increasingly hawkish ahead of the next policy meeting, the Loonie could get a lift; until then, if then, look sideways. –CV