The Canadian dollar may continue to appreciate against its currency counterparts as economists forecast retail sales to rise 0.5% in May, and expectations for an economic recovery later this year may continue stoke demands for higher risk/reward investments as market sentiment improves.

Trading the News: Canadian Retail Sales

What’s Expected

Time of release:                  07/22/2009 12:30 GMT, 08:30 EST

Primary Pair Impact :          USDCAD

Expected:                              0.5%

Previous:                               -0.8%

April 2009 Canada Retail Sales

Canadian Dollar Surge May Not Find a Supportive Bank of Canada

The Canadian dollar posted the most aggressive advance against the benchmark greenback this past week (4.3 percent) even though domestic data was decidedly mixed and the USDCAD’s correlation to risk trends is comparatively minor. On the other hand, after nearly a month of tight congestion - with a notable bias in the dollar’s favor – a breakout was inevitable.

Canadian Dollar Surge May Not Find a Supportive Bank of Canada

Fundamental Forecast for Canadian Dollar: Bearish

- Inflation shrank at its fastest pace since 1955, but not when you exclude gas prices
- BoC surveys show the best prospects for business sales in a decade, but worst credit conditions in two years
- Canadian dollar proves far more volatile than its usual crude driver

The Canadian dollar posted the most aggressive advance against the benchmark greenback this past week (4.3 percent) even though domestic data was decidedly mixed and the USDCAD’s correlation to risk trends is comparatively minor. On the other hand, after nearly a month of tight congestion - with a notable bias in the dollar’s favor – a breakout was inevitable. And, considering the buildup of positive fundamental pressure over the past few weeks with better than expected readings in areas like employment, housing starts and business activity; it was greenback’s ill-gotten appreciation was looking overdone. Now, heading into a new week nearly 500 points lower, we have to consider whether the commodity currency’s push has in turn been overdone. With an active earnings week and a round of significant event risk, fundamentals could prove more of a burden than a boon for the loonie.

With volatility as a guide, the most likely fundamental driver for USDCAD over the coming week is the combination of earnings and questionable stability of the financial sector. In sync with the US, Canada’s earnings season picks up next week with reports from EnCana, Suncor and Canadian National Railway among others. These reports will have the specific effect of gauging the health the nation’s business sector as they balance uncertain domestic and foreign demand. Earnings from the US will certainly have its own impact on the Canadian currency. Aside from revealing demand for Canadian exports from the country’s largest trade partner; state-side accounting figures will define the market’s risk profile. Last week, a few better-than-expected figures from key blue chip companies sparked a global rally in risk appetite and subsequently catalyzed the USDCAD’s breakout.  If numbers from here on out aren’t as impressive Goldman Sachs or Intel this past week, the commodity currencies could reverse along with sentiment.

Another dynamic that could be borne from the market is the health of the financial sector. Heading into the close of the week, US commercial lender CIT was heading towards bankruptcy as a $1 billion debt was coming due and the Treasury said it was unwilling to extend the firm a second bailout (suggesting the policy authority deemed its potential failure not a system risk). This plays into the international securities transactions report due Monday morning; but will a disruption in the US financial markets mean capital flight to Canada? Unlikely. In fact, if this or any other major institution threatens collapse, liquidity will be sought after in US Treasuries – which are abundant after record rounds of sales to fund ever-growing deficits.

Back with the boarders of Canada, loonie traders will find a few notable economic drivers to derive volatility from. The second quarter GDP release is still a long ways off (the monthly reading for May is due at the end of this month); but speculators are nonetheless interested in the nation’s pace of recovery – especially in comparison to its US counterpart. As such, retail sales will provide a key measure of domestic demand and activity. However, the volatile month-to-month changes in this report will likely offer limited, immediate impact for price action. The Bank of Canada, though, may stir up a little more action. The central bank will announce its policy decision on Tuesday. Governor Carney has said just this past month that Canada’s recession has become as deep as its US neighbors and household debt was a ballooning problem; so while a change in rates is unlikely, a shift towards unorthodox policy is possible. Beyond that, not much is likely to be said about forecasts as the group’s monetary policy report is due on Thursday. The quarter gauge of economic and financial trends will ground fundamental traders with reasonable benchmarks for speculation. – JK

There are traditional range opportunities in some of the majors (like EURUSD and GBP for example); but the lack of profit potential and the terminal patterns these pairs are developing suggest breakouts are a real risk. Instead, I am looking for the relatively quiet conditions for the broader market to temper AUDCAD’s aggressive momentum.

Trading Tip – There are traditional range opportunities in some of the majors (like EURUSD and GBP for example); but the lack of profit potential and the terminal patterns these pairs are developing suggest breakouts are a real risk. Instead, I am looking for the relatively quiet conditions for the broader market to temper AUDCAD’s aggressive momentum. This pair is still mired in a steep, bearish pitch; but the drive behind this move is circumspect and obvious technical levels are offering reason for a stall and reversal. This is certainly a much more speculative proposal than usual; so I will need to approach with caution. Our strategy has entry that is now above spot; which in effect requires something of a reversal to trigger entry. Furthermore, the stop is set wide enough to cover the zone of support along with the general rising trend with a buffer for false breakouts. The initial objective is set within an average daily range; but the second target looks to recoup risk and capture profit on a large rebound. Since this position is already setting up, we will cancel any open orders in 24 hours.

Event Risk for Australia and Canada

Australian – The Australian dollar is first and foremost tied to its sentiment. Relatively strong growth, a high benchmark lending rate and heavy exposure to commodities makes this a speculative favorite. For general risk appetite, no gauge is better to reflect investor optimism than equities. Though the market is more congestive than trending; the general bias has clearly taken a disappointing shift. For specific event risk, the Aussie docket doesn’t really threaten price volatility until next week. The NAB business confidence figures are noteworthy; but they have shown little in the way of market movement in the past. Along similar lines the Westpac Leading Index is too lagging and inaccurate to benchmark a 2Q GDP number that is a long ways off. After the weekend, 2Q inflation and RBA minutes however will give us direct insight into interest rate forecasts.
   
Canada – Canada is the fundamental black sheep of the majors. The economy has avoided the worst of the economic recession with relatively strong domestic demand and healthy exports. What’s more, the local impact of the global financial crisis has been surprisingly limited. However, unlike its Australian counterpart, the Canadian economy has fallen into recession. With clear ties to the health of the US, there is a clear anchor on the performance of the world’s eighth largest economy. This is the reason for the dour forecasts from policy officials; but the favorable comparisons to the nation’s largest trade partner keeps speculation on an even keel. However, these are long-term considerations. Through the short-term, shifts in market sentiment will likely be responsible for most swells in volatility outside of general market tides. From scheduled event risk, there is notable data ahead; but its cumulative market moving impact is doubtful. This week sees manufacturing shipments for May and CPI for June. The former lags the physical trade report and the later is a practice in policy-based economics. The top release is next week’s BoC; but even that is not expected to develop any surprises.

In early deals on Monday, the Canadian dollar showed weakness against its U.S., European and Japanese counterparts as oil prices fell more than $1 to below $59 a barrel today, slipping toward a seven-week low on concerns about the state of the global economy as equities markets tumbled.

Crude oil for August delivery was down 50 cents at $59.39 at 4:37 am ET, after earlier falling $1.01 to a low of $58.88. London Brent fell 40 cents to $60.12.

Oil prices dropped 11 percent last week in their biggest weekly decline since late January as investors talked of the possibility of another dip in economic activity before the onset of recovery, which could delay a rebound in demand for fuel.

Oil shot up 40 percent last quarter and touched an eight-month high of above $73 a barrel as investors shrugged off weak fundamentals and banked on swift global economic recovery.

But a recent slew of bearish data around the globe, which suggested that some of the world’s largest economies were still struggling, prompted a sell-off in both oil and equities.

The Canadian dollar that closed Friday’s trading at 1.6237 against the euro fell to 1.6257 in early deals on Monday. The near term support level for the loonie is seen at 1.633.

During early trading on Monday, the Canadian dollar slipped against the yen. At 5:45 am ET, the loonie-yen pair touched 78.84, down from Friday’s close of 79.49. If the pair drops further, it may likely target the 78.6 level.

Industrial production in Japan grew a seasonally adjusted 5.7% month-on-month in May, revised down from a 5.9% rise reported on June 28, Ministry of Economy, Trade and Industry said today. On an annual basis, industrial output was down an unadjusted 29.5% in May, confirming the int ital estimates.

Meanwhile, a monthly survey from the Cabinet Office showed that Japanese consumer confidence rose to 38.1 in June from 36.3 in May. However, the index stood below the expected reading of 39.5.

The Canadian dollar declined to 1.1674 against the US currency during early deals on Monday. On the downside, 1.173 is seen as the next target level for the loonie. At Friday’s close, the greenback-loonie pair was quoted at 1.1640.

The U.S. monthly budget statement for June is expected in the New York session today.

In early deals on Monday, the Canadian dollar jumped to a new multi-week high of 0.8977 against the Aussie. The next upside target level for the Canadian currency is seen at 0.893. The aussie-loonie pair closed last week’s trading at 0.9066.

The Japanese currency lost ground across the board in early Asian trading on Monday.

The yen drifted lower to 129.57 against the euro, 92.69 versus the US dollar, 150.23 against the pound and 85.57 against the Swiss franc by 8:00 pm ET and this may be compared to Friday’s closing values of 128.99, 92.48, 149.97 and 85.28, respectively.

The Japanese unit also slipped to 58.34 against the New Zealand dollar, 79.94 versus the Canadian dollar and 72.46 versus the Australian dollar by 8:05 pm. The yen closed last week’s deals at 58.03 against the kiwi, 79.49 versus the loonie and 72.03 against the aussie.

The most important part of investing is to clearly understand what you’re investing in. In the currency world, most currency traders will talk about the “seven” majors.

The seven majors are the currencies that are traded most often on major brokerage desks around the world. The seven majors are generally paired with the dollar, so technically, the U.S. dollar would count as the eighth “major.”
Here’s a quick 30 second introduction to each of the major currencies…

U.S. Dollar (USD): The majority of trades in the Forex market involve the U.S. dollar against a different currency because it is currently used as the world’s reserve currency.

Euro (EUR): This is the new kid of the currency majors. Lately, the euro has been stepping up to take its place as a reference currency, as well as a larger component of foreign reserves by banks. It is also known as the anti-dollar because the euro tends to appreciate as the dollar depreciates.

Japanese Yen (JPY): The yen has been known as the carry-trade currency because for years, investors have borrowed yen to fund their carry-trades. Because Japan imports all of its oil, when crude oil prices begin to climb this hurts its economy and greatly impacts the value of the yen.

Swiss Franc (CHF): Also known as Swissie, it is sometimes called a ‘safe heaven,’ due to Switzerland’s independent stance, economy isolation, and strong private banking system. This in turn has made their currency very neutral.

The British pound (GBP): Frequently called, Cable or Sterling, the pound first got these nicknames because it was the first currency the Forex market traded through ‘cables’ across the Atlantic. The pound is the fourth most traded currency on the market and Great Britain’s economy is one of the strongest in Europe.

Canadian dollar (CAD): This currency’s unusual nickname, the Loonie, comes from the coins appearance which features a loon, a common Canadian bird, on the coins backside. Canada is a resource-focused economy, so the price of oil drives this currency along with commodities.

Australian dollar (AUD): Known as the Aussie, this currency is popular in the Forex market because of Australia’s currently high interest rates and generally stable economy. The Australian dollar is greatly influenced and driven by gold prices.

New Zealand dollar (NZD): Also known as the “kiwi,” the New Zealand dollar traditionally tracks the Aussie dollar’s path because these economies are tied together through exports. However, sometimes the New Zealand can fall while the Aussie dollar rises as we have recently witnessed.