Canadian Dollar May Weaken On Global Growth Outlook

Despite improved growth the Canadian dollar fell over 500 points against the dollar as global growth declines. The anticipated decline in demand for raw materials has led to commodity prices dropping, which is expected to weigh on the Canadian economy. The natural resource rich country had been able to withstand the headwinds from the U.S. on the back of the commodity boom.

Canadian Dollar May Weaken On Global Growth Outlook 

Fundamental Outlook for Canadian Dollar: Bearish

- Canadian GDP Grew 0.7% in July, which was its fastest pace since March 2004.

Despite improved growth the Canadian dollar fell over 500 points against the dollar as global growth declines. The anticipated decline in demand for raw materials has led to commodity prices dropping, which is expected to weigh on the Canadian economy. The natural resource rich country had been able to withstand the headwinds from the U.S. on the back of the commodity boom.

The declining global growth picture may continue to weigh on the “loonie” as commodity prices continue to fall. The CRB index has fallen 28% since its July 3 highs and it is no coincidence that the USDCAD has appreciated over 800 bps since. The pair has broken through resistance at 1.0804 the 61.8% Fibo extension of the 1.1883 – 0.9062 decline. 1.0869 the 8/16 high is the next level of resistance, after that the “loonie” could see significant losses reversing its rally in early 2007. The fundamental data on tap traditionally provides event risk for the pair, but with very little change expected in the indicators ,the broader economic factors may dominate price action. The Ivey PMI reading for August is expected to slip to 51.0 from 51.5 as it remains in expansion territory. Yet, the reading would be the lowest since December 2007 and is considerable lower than June’s 65.5 print. Meanwhile, the employment report is expected to show an increase of 12,500 jobs which would be the second consecutive month of gains following the 55,200 drop in July. Relative to the U.S. economy which lost jobs for the past nine months including 159,000 in September, the Canadian labor market is strong. This will increase the prospect of continued domestic growth, which could provide “loonie’ support. Indeed, last month’s International Merchandise Trade balance report showed a narrowing surplus as imports outpaced exports on the back of increased demand for new cars. The upcoming August report is expected to show further narrowing which could be a sign that domestic demand remains strong. However, if exports continue to slump, which is very likely given the current global slowdown, then the outlook for growth will diminish adding to the current bearish Canadian dollar sentiment. - JR

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