My, my! Traders have been on a massive Loonie selling spree lately and it seems like there’s no stopping the Canadian currency from falling further. Here are some reasons why I think more Loonie weakness is in the cards:
1. Weak Canadian economic data
Unless you’ve been living under a rock or floating around in outer space like Robopip, you’d be aware that the Canadian economy has been printing one bad report after another.
Last week, Canada printed a very disappointing Ivey PMI figure of 46.3, reflecting a contraction in the manufacturing industry when analysts were actually expecting to see an improvement from 53.7 to 55.0. Canada also reported a jaw-dropping 6.7% decline in building permits, worse than the estimated 2.3% dip. To top it all off, the jobs report revealed that the economy lost 45.9K jobs in December, enough to push the unemployment rate up from 6.9% to 7.2%.
2. Further declines in oil prices?
It doesn’t help the Loonie’s cause that oil prices have been slipping and sliding lately. A quick look at the daily chart of Brent crude oil suggests that further declines are likely, as a double top pattern has formed and price has already broken below the formation’s neckline:
3. Upside break from long-term consolidation
After a bit of hesitation and a few quick retests, USD/CAD surged higher and came close to testing the 1.1000 major psychological resistance. Bear in mind that the ascending triangle is roughly a thousand pips high, which suggests that the ongoing rally could last until the 1.1600 mark.
4. Hedge funds on “sell mode”
With that, several banking institutions and hedge funds have joined the bear camp, with some analysts projecting that USD/CAD could reach 1.1400 in the near term!
For instance, Amundi Asset Management and Brandywine Global Investment Management LLC predict that the Canadian dollar could keep weakening until the second half of the year. Goldman Sachs, which has already been a Loonie bear since November last year, recently pointed out that weak export industry prospects and slow foreign capital inflows could keep pushing the Loonie down.
5. Potential rate cut?
Last but not least, the dovish outlook of BOC Governor Stephen Poloz has convinced several market participants that a rate cut will happen sooner or later. Earlier this month, he highlighted concerns about weak inflation, a huge contrast to previous statements by former BOC head Mark Carney who said that price levels are starting to normalize.
Bear in mind that the BOC is set to make its interest rate decision next week, which means that traders will probably start pricing in expectations of a downbeat statement and possibly a rate cut in the days leading up to the event. Do you think USD/CAD has a shot at breaking above the 1.1000 mark in the next few days?