Top 3 Forex Drivers for CAD in 2014

It’s time to do one more comdoll end-of-year review, and after already looking at AUD and NZD last week, that leaves CAD as our topic of the day! Let’s see what drove the Loonie in 2014.

Weak Economic Data and Potential Rate Cut Expectations

The Loonie started the year in a funk with all sectors giving off negative vibes. Ivey PMI indicated contractionary conditions (46.3 vs. 53.7 expected) in the manufacturing sector, a jaw-dropping decline in building permits by 6.7% to show weakness in housing, and December jobs data saw a 45.9K jobs decrease that pushed the unemployment rate up to 7.2% from 6.9%! Throw in a weak inflation outlook of only 1% into the mix, it’s no wonder Bank of Canada Governor Poloz ALMOST hinted that interest rate moves may be made.

Conditions remained weak through the first and second quarters of 2014, prompting the BOC to continue to hold rates at 1.00%, and continue to set low expectations on growth and inflation in Canada.

Economic Data Improves

Starting in March and April, we did start to see some pickup in inflation (0.8% and 0.6% respectively), which remained mostly positive through the end of the year. In July, we started to see exports jump, as well as a pick up in retail and wholesales sales. And the big turn around came in August when the error in the July jobs numbers was corrected from only 0.2K to 41.7K net jobs added!

Through November, we saw more a net positive jobs, enough to drop the unemployment rate in Canada down to 6.5% vs. 7.2% in January! By this time, traders were beginning to speculate that the BOC would lean towards a rate hike, especially after the BOC drops the “neutral” stance rhetoric from its policy statement. The shift in positive data actually lifted the Loonie from its lows in April, to most likely finish the year on an upward trajectory (and even positive) against most of the major currencies.

Oil Crashes and USD Rallies

USD/CAD Daily Forex Chart

USD/CAD Daily Forex Chart

Of course, the one big exception to the Loonie’s 2014 performance is how it did against the U.S. dollar. Not only did the positive U.S. growth and the Fed Taper contribute to the Greenback’s strong rally this year, but it also helped push the price of commodities (like the crash in oil), and commodity related currencies (like the Loonie) down through the second half of 2014. The shift in U.S. dollar sentiment is one massive market driver that even the shift in positive Canadian sentiment couldn’t escape.

But now that oil has fallen from $107/barrel to $55/barrel and we’re passed the end of the bond purchasing program in the U.S., will USD/CAD follow the trend of other Loonie pairs? Let us know what you think by voting in the poll below and leaving a comment!