USD/CAD Weekly Forecast January 2-6, 2012, Fundamental Analysis

The USD/CAD pair declined to a three-week low, as the Canadian dollar was supported by an upside punch in crude oil prices, after oil skipped the $100 levels a barrel on concerns of supply disruption from Iran this week and Italian bond auction signaled a strong in drop in yields.

No economic data was released fromCanadain the past week, but data from theUnited Statesmainly showed mixed performance, with an expected drop in home prices in 20 metropolitan cities in the U.S added to signs housing market remains pressured down by foreclosures, while consumer confidence in the U.S bounced up to its highest level since April 2011.

Though 4-week moving average for jobless claims in the U.S dropped to a three-year low in the past week, a rise in number of Americans filing for unemployment benefits in the December 24 week highlighted the ongoing struggle of labor markets to seek safety in December.

In addition, the Chicago-based ISM signaled that business activity in the U.S expanded more than forecast in December, while an index of pending home sales in the U.S increased well above forecast in November, indicating the sector which first triggered the 2008 crash is picking up moderately.

Jumping to the 17-bloc euro area, the Rome-based Treasury of Italy did a nearly good job trying to raise nearly 20 billion euros at its two bond auctions in the past week.Italysold 9 billion euros on 179-day bills and 1.733 billion euros of 2012 debt at an auction on Wednesday, while sold 7 billion euros of longer-maturing debt the day after.

Debt crisis risks occupied the headlines as usual, sending the euro against the US dollar to its lowest level since September 2010 in the past week, as the slightly disappointing Italian auction of longer-term debt and lenders’ outclassed demand of ECB’s three-year loans spooked traders and failed to cool stoked markets before the year end.

High level of uncertainty in markets could provide the USD/CAD pair with more bullish momentum, where traders will be eyeing developments in the 17-nation euro area, and accordingly, we should expectEuropeto dominate the pair’s movement next week.

Nonetheless, if optimism spreads through markets, the USD/CAD pair will decline, as demand for higher yielding assets is likely to rise in that case, and that should provide the Canadian dollar with momentum.

Highlights for this week that will probably affect Crude Oil direction are:

Monday January 2:

Markets and banks will be closed on Monday to celebrate the New Year’s DayHoliday.

Tuesday January 3:

TheUnited Stateswill join the session at 15:00 GMT with the Construction Spending Monthly Index for November, which could have expanded by 0.5% from 0.8%

TheUnited Stateswill also release the ISM Manufacturing for December, with expectations the index have expanded to 53.2 from 52.7.

At 19:00 GMT the Federal Reserve will provide markets with the Minutes of the FOMC last meeting.

Wednesday January 4:

TheUnited Stateswill join the session at 15:00 GMT with the factory orders index for November, which could have expanded by 2.0% from the previous drop of 0.4%.

Thursday January 5:

TheUnited Stateswill join the session at 13:15 GMT with the ADP Employment Change from December, where the private sector is projected to add 175 thousand additional jobs compared with the previous addition of 206 thousand jobs.

At 13:30 GMT theUnited Stateswill release the Initial Jobless Claims (DEC 31), where jobless claims are expected lower at 375 thousands compared with the prior 381 thousands.

At 15:00 GMT theUnited Stateswill provide the ISM Non-Manufacturing Composite index for December, which could have expanded to 53.0 from 52.0.

Canada will be joining the session as well, as Canada’s indexes of industrial product and raw material prices will be due out Thursday, where industrial product price index in expected to fall by -0.3% from -0.1% in November.

In addition, Canada Ivy Purchasing managers’ index is forecasted to ease at 59.1 from 59.9 in December.

Friday January 6:

TheUnited Stateswill join the session at 13:30 GMT with the Monthly Jobs Report for December, with expectation the economy will add 150 thousands new jobs compared with the prior addition of 120 thousands, yet the unemployment rate is projected to climb to 8.7% from 8.6%. The average hourly earnings monthly index could have slightly expanded by 0.2% from the previous drop of 0.1%.

Canadaemployment report will be also released on Friday, where projections suggest thatCanada’s unemployment rate will remain steady at 7.4% in December while the net change in employment will show a gain of 14.3 thousand jobs in December from the 18.6 thousand shed in November.

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