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Canadian Dollar Weekly Outlook: Waning Risk Appetite and Oil Prices Compound Losses



 

 

USD/CAD DAILY AVA FX CHART    24 Jan 22

Summary

Canadian Dollar Bias: Bearish

- Events: Fri- Industrial Product Price m/m, Gross Domestic Product m/m

- Bank of Canada Keeps Interest Rates Unchanged, Trims Growth Forecast

- Canadian Dollar Slumps 1.5% Against USD on Weak Inflation Figures

- Link to oil prices further weighs CAD for now, as does its low rate, making it the first carry trade buy to exit in times of trouble

Analysis

As long as widespread risk aversion persists, which will continue to pressure stocks, commodities, and correlated currencies, the Canadian Dollar is likely to extend losses after slipping 3% against its US counterpart last week. See our Global Stocks, Forex, Commodities Weekly Outlook 1/25 – 1/29: Key Events & Implications for details on the forces generating the current risk aversion. These included:

  • Q4 earnings reports disappointed investors on revenues. That would have been overlooked last year but now is far more critical with the end of stimulus measures approaching and concerns that the economic recovery must become self-sufficient
  • Uncertainty on whether Fed Chairman Ben Bernanke, a figure the markets view a key positive force amid the 2008 financial crisis, will be confirmed for a second term
  • Concern over how badly US President Obama proposed wide-reaching new restrictions on banks’ size and trading activities will impair bank earnings
  • Stronger-than-expected Chinese GDP and inflation figures stoked speculation that Beijing would step up efforts to restrict lending amid fears the economy may overheat
  • Continuing sovereign debt trouble in the EZ

 

Given these fear factors, it’s not surprising that Friday’s closing bell marked the end of the worst three-day stretch for US equity markets since last year’s broad-based recovery in risk appetite began in March. The VIX index of stock option volatility, a standby “fear” gauge, surged 55% over the past three days to post the biggest gain since 2007and gained 25% on Friday alone.

The Canadian Dollar was not spared the carnage as the long bid-up commodity bloc currencies bore the brunt of the flight from risky assets. The Loonie’s drop over the past week was second only to that of the New Zealand Dollar. With seemingly no easy resolution to any of the issues now weighing on investor confidence, more of the same is likely ahead, barring surprise news or a reaction bounce.

The Canadian dollar is a risk currency, rising on optimism and falling on fear. For example, short-term correlation between a trade-weighted index of the Canadian unit’s average value and the MSCI World Stock Index now stands at 91%, hinting at deeper losses for the currency as capital continues to pour into safe-haven investments.

Events

November’s Gross Domestic Product reading is the only significant item on the Canadian economic calendar. Expectations call for the economy to have expanded 0.3% from the previous month, marking the third consecutive period of positive growth. However, the outcome may not prove especially market-moving considering its limited likely affect on monetary policy after the Bank of Canada reiterated that it plans to keep interest rates at record lows at least until June and downgraded its 2010 economic growth outlook last week.

DISCLOSURE: NO POSITIONS