USD/CAD Weekly Fundamental Analysis May 28 – June 1, 2012, Forecast

Introduction: The Canadian Dollar moves in reaction to the US Dollar. Movements are small and easy to track and trade. The Canadian Dollar also responds to economic reports within Canada. It has little action against foreign currencies except during major moves or crisis.

The USD/CAD is the single biggest beneficiary of rising oil prices. Canada which is already the biggest exporter of oil to the US will experience a boost to its economy when oil price continue to increase. Therefore, if oil rises the Canadian dollar is likely to follow. Over the past years, the correlation between the Canadian dollar and oil prices has been approximately 81%. 

Weekly Analysis and Recommendation:

The USD/CAD closed out the week before the US holiday at 1.0293. Markets shifted based on position squaring, particularly as there is hope for a European solution and the European Redemption Fund comes back into the headlines. As the global growth outlook softens and the European crisis escalates, it becomes increasingly clear that the need for more than a band aid solution is rising and threatening global financial market stability.  In this environment, equities are quiet

Highest: 1.0312

Lowest: 1.0152

Difference: 0.0160

Average: 1.0244

Change %: 1.14

As the Euro‐crisis escalates traders have rapidly pared their bets for interest rate hikes by the BoC. As the top chart details, at the end of April there was one hike fully priced in over the next 9‐months; this has now fallen to just a 10% chance of a hike. Rising vol, dropping oil, increasing uncertainty on the global growth picture are all weighing heavily on Canadian interest rate expectations and CAD.

Canada Q1 GDP will be released on June 1, and markets are anticipating GDP growth of 2% with an increase of 0.4% in the monthly income-approach number. We think that Canadian consumers slowed down their shopping during Q1 2012. Retail sales data indicate that the contribution to growth from retail trade will be just about zero on the quarter — after retail sales grew at an annualized rate of 6.9% from Q3 2011 to Q4 2011. The pace of retail sales is the principal proxy that we use in order to estimate changes in consumption as measured in the ‘expenditure-approach’ GDP numbers which markets typically focus on. Slower consumption would allay concerns that Canadian consumers are ramping up their shopping, thereby posing a threat to the macro economy and necessitating ‘prudential’ action to defuse their binging. Rather, Canadian consumers have already binged, with Canada’s aggregate consumption having expanded post-2008 even as most of the developed world economies have retrenched. The question now is whether the slow-down will be gradual or abrupt. Aside from watching the consumption numbers, we’ll be looking to see the extent to which construction continues to drive growth. The other major issue is the contribution to growth from oil and gas extraction, which looked fairly weak through the first two months of 2012

FxEmpire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more up to the data analysis and information in our weekly reports.

Major Economic Events for the week of May 21-25 actual v. forecast for the Canadian & US Dollar

Currency

 

Actual

Forecast

Previous

USD

Existing Home Sales

4.62M

4.62M

4.47M

CAD

Core Retail Sales m/m

0.1%

0.5%

0.4%

CAD

Retail Sales m/m

0.4%

0.4%

-0.2%

USD

New Home Sales

343K

335K

332K

USD

Crude Oil Inventories

0.9M

0.8M

2.1M

USD

Core Durable Goods Orders m/m

-0.6%

1.1%

-0.8%

USD

Unemployment Claims

370K

372K

372K

USD

Durable Goods Orders m/m

0.2%

0.5%

-3.7%

USD

Revised UoM Consumer

79.3

77.7

77.8

 Historical:

Highest: 1.0842 CAD on 01 Nov 2009.

Average: 1.0147 CAD over this period.

Lowest: 0.9407  CAD on 26 Jan 2011.

 

Economic Highlights of the coming week that affect the American and Canadian Markets.

Date

Time

Currency

 

Previous

 

May 28

Tentative

USD

Treasury Currency Report

 

 

May 29

13:00

USD

S&P/CS Composite-20 HPI y/y

-3.5%

14:00

USD

CB Consumer Confidence

69.2

 

May 30

12:30

CAD

RMPI m/m

-1.6%

14:00

USD

Pending Home Sales m/m

4.1%

 

May 31

12:15

USD

ADP Non-Farm Employment

119K

12:30

CAD

Current Account

-10.3B

12:30

USD

Prelim GDP q/q

2.2%

12:30

USD

Unemployment Claims

370K

13:45

USD

Chicago PMI

56.2

15:00

USD

Crude Oil Inventories

0.9M

 

Jun 1

12:30

CAD

GDP m/m

-0.2%

12:30

USD

Non-Farm Employment

115K

12:30

USD

Unemployment Rate

8.1%

12:30

USD

Core PCE Price Index m/m

0.2%

12:30

USD

Personal Spending m/m

0.3%

14:00

USD

ISM Manufacturing PMI

54.8

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