Loonie Letdown
Fundamentals
The Canadian Dollar has rebounded from 4 ½ year lows against the US Dollar this morning, as traders flock to currencies with higher interest rates. The Canadian economy continues to falter due to the slowdown in the US, its largest trade partner. Weak petroleum demand and low prices in the US have been an area of concern for our neighbors to the north. The sad state of the US auto industry, which produces many cars driven in the States and Canada, is also weighing heavily on the labor market. Employers are slashing jobs at a quicker pace than previously expected due to the slowdown in both raw material exports and autos. Friday's employment data is expected to show the Canadian unemployment rate climbing to 7.4 percent, the highest level in exactly 5 years. The domino effect has also spilled over to the housing market, with housing starts falling 12 percent in February, the lowest level in over 8 years. Outside forces have also pushed the loonie lower. It seems as though every sharp global stock market sell-off causes investors to flock to what are perceived as "safe haven" currencies in the form of the US Dollar and Japanese Yen, at the expense of commodity currencies, like the Canadian and Australian Dollars.
It is not all doom and gloom for the Canadian economy, though. Relative to the US, the unemployment rate has held up fairly well. Also, the financial and banking sectors have been largely isolated from the mess that the US and Europe are facing at the present moment, which could result in domestic credit markets being restored well ahead much of the West. The US stimulus package could revive demand for raw materials in the US that has been sorely needed. More importantly, the actions of central banks around the globe could spark very high inflation, a scenario that would likely be very supportive of the Canadian Dollar. This may be a far-sighted view at this point, though, as heavy consumption of raw materials is usually the driving force behind inflationary conditions.
Technicals
The June Canadian Dollar chart shows prices hanging around support nears 0.7730. Prices were able to bounce back late yesterday to come back to support instead of confirming a breakout. This could be supportive of prices moving forward if the market is able to gain traction here. A downside breakout could sent prices spiraling toward the mid-0.65's, based on the measure of the wedge formation that has been building on the weekly chart. There is minor chart support near 0.7500, but major support does not come into the picture until the 0.7000 level.
Rob Kurzatkowski, Senior Commodity Analyst
