Canadian Dollar: Performance and Its Drivers in Near Future

The Canadian dollar wasn’t performing well recently, at least against the dollar and the yen. Can the currency improve its behavior in the near future? It’s possible, but not probable. The performance against the euro and other growth-related currencies is another matter.

The loonie, like most other currencies, is currently driven mainly by news from Europe. And the news wasn’t very good. It’s true that the summit last Friday has brought some results. But the positive effect was weak and gone completely as Moody’s Investors Service warned today that the inability of the European leaders to address the issues of the eurozone threatens the credit rating of the EU countries. The announcement, together with the earlier warning from Standard & Poor’s, maintained the negative outlook for Europe. The downbeat expectations would likely to suppress commodity currencies, including the Canadian dollar.

The Canadian currency may get help from the United States, the main trading partner of Canada, as the US economy currently looks a way better than the European one. Two major events this week will impact the outlook for the economy of the USA (and the prospects of Canada’s currency as a result): the monetary policy meeting of the Federal Reserve and the inflation report. The Fed is expected to keep the interest rates low, but it’s hard to predict what it’ll say in its statement and how that will affect the Forex market. The inflation report is expected to be good, showing a 0.1 percent growth in November after the 0.1 percent decrease in the month before. It’s unlikely that the news from America would allow the loonie to outperform the US dollar or the yen, but the Canadian dollar may rise above other most traded currencies.

Crude oil is another major factor in the performance of the loonie as it’s the main export of Canada. For now, crude, as well as other commodities, depends largely on the events in Europe, but there are factors that are specific to oil. The most important events are those that boost or disrupt supply. Will Iran be prevented from exporting oil, will Libya restore its production, how OPEC will change its quotas – all that may have a tremendous impact on crude, at least in a short term.

In general, the outlook for the Canadian dollar is neutral, downside-biased against the greenback and the yen, but with an upside potential against other currencies tied to growth.

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