The Canadian dollar didn’t go anywhere fast in December, but managed to make some gains against the greenback.
After support held nicely over and over again, USD/CAD has a potential to fall.
* This article is part of the January 2013 monthly forex report. You can download the full report by joining the newsletter in the form below.
- QE: Even if QE-infinity is not really forever, the Fed is still printing $85 billion every month. This money goes into bonds, and then continues into stocks and commodities. As a commodity currency, the Canadian dollar benefits from QE.
- Strong employment data: After a few unstable months and drops in GDP, Canada posted two consecutive excellent reports: full time jobs are on the rise and the unemployment rate is on the fall. The internal strength of the Canadian economy is clear to see.
- No recession in the US: The most important factor for the Canadian economy is demand from the US. While the US recovery is frustrating, it is still steady: jobs are growing, PMIs are on the rise and the fears of recession are weaker. A stronger US economy means a stronger Canadian dollar.
- Stayed behind fellow commodity currencies: The kiwi and the Aussie have performed somewhat better than the loonie in recent months, with the kiwi leading. C$ could close the gap.
- Less hawkish BOC statement already digested by the markets. One of the things that hurt C$ was a notion that the Bank of Canada has become less hawkish and isn’t really on the guard against potential inflation. This has already been digested by the markets. With an improving economy, the statements can return to hawkishness.
During January, the Canadian dollar could therefore make gains. The only ongoing issue is the housing sector. So far, the issue seems to be contained.
Apart from the rate decision, retail sales could provide a boost for the loonie: they have risen nicely in November, and the report for December could also be positive.