The Canadian dollar was the strongest gainer in November, but not by a big margin. We are seeing that the loonie is becoming more and more dependent on the situation in the US.
So far, this has helped the Canadian dollar, as internal figures haven’t been so good. Will this continue?
* This article is part of the December monthly forex report. You can download the full report by joining the newsletter in the form below.
The strongest evidence of the loonie’s dependence on the US was seen in the simultaneous release of jobs data from the US and Canada: Canada printed a weak report and the US a good one. A weaker Canadian dollar against a stronger US dollar could be expected, but the opposite happened.
Why? Because Canada depends on US demand, more than anything else: more than internal figures, and more than oil.
Internal figures still matter though, and they weren’t so good:
- GDP disappointed again: After dropping in August, the Canadian economy remained flat in September, the last month of Q3. Just before Christmas, Canada will release GDP for October, the first month of Q4, and this will have an impact on the currency as liquidity slides.
- Building Permits plunge: While this is a volatile figure, the drop of 13.2% reported during November was a bit of a shocker, especially as it adds to the claim that Canada is now seeing the bust of a housing bubble. If prices fall quickly, this could bring the whole economy down. Also housing starts disappointed by standing at only 204K.
- Retail sales are weak: the headline figure rose by only 0.1% while the core figure remained flat. This points to a slowdown.
- Jobs: Canada gained only 1.8K jobs in October, after a strong September. The release for November will be closely watched.
- Carney’s departure: The outgoing governor of the Bank of Canada is considered a hawk. While he will only depart at the end of May 2013, his heir is expected to be more dovish. This also weakens the loonie.
The price of oil hasn’t gone too far during the weeklong Gaza conflict. Now that a ceasefire has been restored, the price of oil isn’t high enough to boost the loonie.
One internal thing that could positively impact the loonie positively during December is a potential approval of big acquisitions of Canadian companies by Asian companies. Canadian regulators are examining the acquisition proposals of Nexen and Progress Energy. If both deals are approved, it could boost the loonie.
The Canadian dollar therefore needs a strong US and especially a good resolution of the fiscal cliff in order to remain strong. It currently enjoys some optimism around the world, but this needs to be backed by facts.
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