Outlook for USD/CAD cross during the upcoming week

The loonie, as the Canadian dollar is known, declined for a third week against its US counterpart, after BoCs announcement that interest rates may stay lower for a prolonged period of time, in contrast with the Feds decision to let borrowing costs rise by cutting its bond-purchasing program “in the coming months”.

Having hit a session high at 1.0707 at 13:30 GMT on Friday, close to the highest Wednesdays rate of 1.0708, the strongest since May 2010, USD/CAD closed at 1.0634 on Friday, losing 0.14% on a daily basis. However, the USD/CAD pair marked a third consecutive week of gains. Support was likely to be received at December 2nd low, 1.0614, while resistance was to be encountered at May 26th 2010 high 1.0745.

Statistics Canada reported on Friday that the nation’s employment rose by 21 600 in November and the unemployment rate remained at 6.9%. The jobless rate held at a level, which was the lowest since 2008 for a third consecutive month, as employers hired new part-time workers. Analysts had predicted 12 000 new job positions and an unchanged jobless rate.

Canadian companies postpone major investments, as the global demand is still modest and the Bank of Canada kept its main interest rate at 1% on Wednesday, reasoning the decision with a significant slowdown in the economy.

According to the data by Statistics Canada, almost all of the jobs added in November are a result of the 20 000 part-time positions, while full-time positions increased by mere 1 400.

This year part-time employment accounted for 46% of all job gains, while during the same period last year, 99% of the jobs created were full-time.

On Wednesday, the loonie, came under selling pressure after Bank of Canada confirmed that monetary stimulus is still appropriate, but there are some downside risks to inflation, which seem greater than previously thought. In an accompanying statement the BoC said it considered “that the substantial monetary policy stimulus currently in place remains appropriate.”

Canada reported its first trade surplus in more than a year in October. Last trade surplus has been recorded in April 2011. Statistics Canada reported that the country’s trade surplus was CAD 0.08 billion in October, compared to a deficit of CAD 0.30 billion in September, as the latter has been revised from a previously reported deficit of CAD 0.44 billion.

Dean Popplewell, head analyst at the online currency-trading firm Oanda Corp., said, cited by Bloomberg: “Inflation obviously is the problem- it really is the central bank’s focus now, the job number has done nothing to persuade the Bank of Canada from its neutral policy stance. The trend is for the loonie to experience further weakness.”

Meanwhile, much-better-than-expected economic data came from the US. The Labor Department reported that unemployment in the U.S. fell to 7.0% in November, the lowest in five years, beating projections for a minor decline to 7.2% from October’s rate of 7.3%.

U.S. employers added more jobs last month than projected. Non-farm payrolls jumped to 203 000, confounding expectations of a lesser number of jobs, 183 000, while in October the job number has been downwardly revised to 200 000. The progress in the labor market will probably provide a spark for the US economy, analysts expected.

The recovering labor market led to improving sentiment and higher spending, despite a 0.1% decline in household income. Household spending, which accounts for 70% of the economy, rose by 0.3% in October, beating both projections and last month’s increase of 0.2%.

US average hourly earnings increased to 0.2% in November from the previous month to reach $24.15, a 2% yearly increase. Average weekly hours for all workers also increased, from 34.4 in October to 34.5 in November.

Core personal consumption expenditures (PCE) met analysts projections on both monthly and annual basis, jumping by 0.1% and 1.1% in October, respectively.

Russell Price, senior economist at Ameriprise Financial Inc. in Detroit, said for Bloomberg before the report: “People are feeling better, that’s a positive for the holiday season. This year I don’t see the same strong fiscal headwinds ahead of us to impede our momentum.”

Backing Price’s statement, a flash reading showed consumer confidence in the U.S. increased more than expected in December, hitting the highest level in five months. The preliminary Thomson Reuters/University of Michigan Consumer Sentiment index posted at 82.5 this month, up from 75.1 in October and sharply exceeding projections for a minor improvement to 76.0. The strong confidence was largely based on gains in employment, stock market and property values, offsetting October’s 16-day federal government shutdown.

This comes after the US Commerce Department reported on Thursday the nation’s preliminary Gross Domestic Product grew at a 3.6% annualized rate in the third quarter, up from the initial estimate of 2.8% and the strongest since Q1 of 2012, beating analysts’ projections of a 3.1% expansion. According to the report, US growth was mainly driven by the largest increase in inventories since early 1998. Inventories increased at a $116.5 billion annualized pace in Q3, compared to $86 billion rate the preceding quarter.

A separate report released by the Labor Department showed that the number of people who filed for initial unemployment benefits sharply dropped in the week ended November 30. Initial Jobless Claims declined to 298 000 last week, compared to an upward revised 321 000 claims in the preceding week, confounding analysts’ expectations for a jump to 325 000.

Fed policymakers may reduce their $85 billion monthly program of bond purchases on their next meeting December 18th-19th, prompted by the brightened US economy outlook. However, broad expectations called for a sustained stimulus until next year. A survey conducted by Bloomberg last month revealed that the Fed will probably trim its asset purchases to $70 billion from $85 billion at its March 18-19th meeting.

“The decline in the Canadian dollar has been too fast, I’m overall bearish on the CAD, we just need to see U.S. yields rise more”, said Vassili Serebriakov, a foreign-exchange strategist at BNP Paribas SA in New York, cited by Bloomberg.

USD/CAD cross may be influenced by a number of reports, scheduled for publication during the week, as follows:

On Monday (December 9th) Canada is expected to publish a report on the number of Housing starts. Meanwhile, the Governor of Federal Reserve Bank of St. Louis, James Bullard will take a statement.

On Wednesday (December 11th) the US Department of the Treasury’s Financial Management Service will publish its Monthly Treasury Statement (MTS) for November. Analysts projections point to negative $154.5 billion.

On Thursday, (December 12th) Canada will publish its monthly New Housing Price Index for October. Meanwhile US will publish reports on monthly retail sales for November, retail sales less autos for November, Import Price Index for November, Initial Jobless Claims for the week ended December 7th and the annual Import Price Index.

On Friday, (December 13th) US will report on its monthly and annual Producer Price Index (PPI) and monthly and annual Core PPI.