Canada Markets

A double dose of weak Canadian economic data was released Tuesday, with a sharp sell-off in the Canadian dollar being the end result. This will mean different things to Canadians, although the export sector will welcome the weakness in the loonie.

First off was the release of Canada's Purchase Manager's Index for December which was announced at 46.3, with readings below 50 indicating a contraction in the economy. The November reading was 53.7, while pre-report estimates called for a rise in December reading.

Also on Tuesday was a Statistics Canada report indicating weak trade data for the month of November. Canada's trade deficit was announced at $940 million, well above expectations, while October data was also revised to reflect a wider trade gap. The data reflects a situation where the Canadian economy is failing to advance despite growth in the U.S. economy and a lower dollar which should lead to increased exports. Exports to the U.S. were reported to grow by .6%, although imports grew by 2%. Bank of Canada Governor Stephen Poloz has suggested in the past that the largest risk to the Canadian economy is the failure for the export sector to reach targeted levels.

Besides the weak Canadian data, also affecting the Canadian dollar was U.S. dollar strength today based on a favorable jobs report for December in the United States, with ADP's report indicating the fastest job growth in thirteen months was experienced in December, which rallied the U.S. dollar against other currencies.

The Canadian dollar lost 96 basis points in Tuesday's trade, while further losses of nearly 50 points is seen in Wednesday's trade which is near a three-year low. As seen on the chart, the Canadian dollar is oversold as seen on the lower study, although expectations are for further losses. The 50% retracement level of the move from the March 2009 low of $.7653 to the July 2011 high of $1.0618 is $.9136 CAD/USD, which is fast approaching.

A number of banks have forecast the loonie to hit anywhere from a low of 88 cents to a high of 92 cents. Perhaps the most bearish forecast has come from Goldman Sachs in the U.S., who has called for a low of 88 cents and advised clients to short the Canadian dollar, naming it one of its top three trades of 2014. Should the 50% retracement level fail to hold the dollar at $.9136, the next level of support to be tested would be the 61.8% Fibonacci retracement at $.8786 CAD/USD, which would favor the Goldman forecast.

Non-commercial traders held a net-short position of 57,956 contracts as of Dec. 30 according to the Commodity Futures Trading Commission, after reaching a 33-week high of minus 65,500 contracts just two weeks earlier. This Friday's data should indicate an increase in bearish activity on the part of investors.

Other factors which continue to weigh heavily on the Canadian dollar are the reduction in exports of both oil and natural gas to the U.S. due to increased drilling activity in the U.S., as well as Canada's extremely low inflation rate which does not signal an increase anytime soon which limits interest in the currency. Further weakness could also be experienced as the U.S. further reduces or "tapers" their monthly stimulus spending which will lead to further U.S. dollar strength.

Canadian exporters will welcome the lower-valued Canadian dollar at a time when clearing Canadian inventory is critical.

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Cliff Jamieson can be reached at cliff.jamieson@dtn.com

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