Week In FX: Canada’s Loonie Drawn and Quartered

By early Friday morning, the Canadian ‘bull’ thought they were on to a good thing. Long the loonie, as the Canadian dollar coin is known, is on the verge of taking out its six-month highs at $1.0620. It actually had some investors managing to snatch defeat from the jaws of victory by being stopped out within minutes of Canada’s disappointing employment report release.

The CAD weakened abruptly after the data showed that the Canadian economy unexpectedly lost jobs (-9.4k versus an expected +20k gain) and the unemployment rate climbed from +7% to +7.1%. The horrid headline print would suggest that the Bank of Canada (BoC) would have to continue its cautious approach. The numbers are evidence enough that there is still slack in the economy. Canadian employment continues to struggle to move above the six-month average (+9k); the unemployment rate is not declining, and wage growth remains subdued; all indicators that Governor Stephen Poloz and his team will have to continue to focus on. Friday’s disappointing report supports the BoC’s quarterly business outlook released earlier this week, which indicated lower hiring plans.

Labor market slack combined with an uncertain economic outlook suggests that underlying inflation over the medium term is likely to remain low. Surely Poloz is more concerned about the downside risks to inflation. After all, it’s not just a potential European phenomenon. The disappointing jobs report gives the BoC all the justification it needs to maintain its dovish stance during next week’s interest rate decision and quarterly monetary report. Now that the loonie has traded through its key support levels ($1.0700 and $1.0720), investors should expect the CAD to be better bid on pullbacks before next week’s BoC address.

A Look Ahead

In contrast to Europe, North America will be exposed to a plethora of data releases, ranging from U.S. retail sales to Canadian wholesales reports. Federal Reserve Chair Janet Yellen’s testimony before the Senate Banking Committee in Washington, D.C., on Tuesday will be a factor prior to the BoC rate decision mid-week. This week ends with investors getting a taste of U.S. consumer sentiment.

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