USD/CAD: Loonie Falters on Grim Signs for the Canadian Economy

The Canadian dollar is presumed to succumb further to the US dollar today on views that the Canadian economy stalled at the end of 2012, putting pressure on the Bank of Canada to extend a period of low interest rates. The economy received a double whammy last Friday after sales and inflation data came in below expectations. Meanwhile, ongoing concerns over the looming sequester are seen to lift the safe haven US dollar.

In a further sign that the fourth quarter proved to be weak for the Canadian economy, retail sales plunged 2.1 percent in December, surprising the markets which deemed that the allure of the holiday shopping season offset the effects of stagnant wages and record high debt levels. The figure, much larger than median estimates of a 0.3 percent decline, marked the largest dip in almost three years. A separate Statscan report showed annual inflation rose at a mere 0.5 percent in January, recording the smallest yearly increase in consumer prices since October 2009. The rate is less than the 0.7 percent predicted by market analysts and farther outside the Bank of Canada’s target range of 1 to 3 percent. The closely-watched core rate dipped to 1 percent from 1.1 percent in December.

StatsCan is scheduled to release GDP figures for December and the entire fourth quarter on Friday, and analysts say the data provide a grim omen. The decline in sales in December, combined with reported drops in wholesale sales, factory shipments, and housing starts all suggest that the economy contracted in the final month of 2012. Economists estimate that GDP likely shrank by as much as 0.3 percent in December, culminating a quarter which is tipped to have seen the economy grow by an annual pace of less than 1 percent. Should such estimates be accurate, the Q4 would mark the second straight quarter of growth under 1 percent. A bleak economic outlook, coupled with subdued inflation, likely strengthens the case for the BOC to extend its interest rate pause.

Meanwhile, the markets are presumed to be jittery this week as the White House and Congress are facing a deadline to reach a compromise to avert automatic federal spending cuts scheduled to kick in Friday. The so-called sequester compromised up to $85 Billion in automatic spending cuts for government services this year, potentially impacting the continuing recovery of the US economy. There was no sign of movement over the weekend over tax increases called by President Obama and rejected by Republicans. Considering these, a long position is then recommended for the USD/CAD trades today.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.