Why Trading the Loonie Has Been Tricker These Days

If you’re a good ol’ fundamentals guy like me, you’re probably convinced that the Canadian economy ain’t doing so well. Even so, the Loonie has managed to stay afloat or even rally against some of its forex peers lately. What’s up with that?!

Let’s take a quick look at how the numbers have been faring so far. 

Earlier in the month, Canada printed stronger than expected headline jobs figures but I shared with y’all how these readings were actually misleading. A closer look at the components of the October data reveals that most of the gains were simply spurred by part-time hiring, with other underlying labor figures also indicating weak spots.

Apart from prevailing weaknesses in the energy sector, the manufacturing industry also hasn’t fared all too well, with the October Ivey PMI falling from 53.7 to 53.1 to indicate a slower pace of growth. This marks back-to-back declines for the index, as it posted a sharp tumble from 58.0 to 53.7 back in September.

Last week’s manufacturing sales release turned out to be a huge disappointment as well, with the actual figure showing a 1.5% tumble instead of the projected 0.3% uptick for September. Now this is considered a leading indicator of business conditions since changes in manufacturers sales levels typically affect future spending, hiring, and investment.

Looking at the retail sales reports released last Friday reveals that the consumer sector is also feeling blue, as the September headline figure indicated a worse than expected 0.5% slide versus the estimated 0.1% uptick while the core figure printed a sharper 0.5% decline instead of the projected 0.3% drop. This caps off four consecutive monthly gains, with 8 out of 11 sub-sectors reporting lower sales numbers.

October inflation data, on the other hand, had some bright spots. The headline CPI came in line with expectations of a 0.1% uptick while the core figure beat expectations and posted a 0.3% gain. Underlying data shows that price levels were supported mostly by a pickup in food prices, followed by household operations, furnishings, and equipment. On a less upbeat note, transportation costs were still on a decline, recording its twelfth consecutive year-over-year drop.

Not a pretty economic picture, ain’t it? So why isn’t the Loonie bleeding all over the forex charts?

For one, much of Canada’s economic weakness has long been priced in, as forex market watchers have probably gotten tired of hearing all about the impact of the oil price yada, yada, yada. Heck, this theme has been lingering in the financial markets for more than a year already!

Another possible reason is that there have been a few glimmers of hope in the oil industry every now and then, leading analysts to anticipate that the commodity price may have already bottomed out. Even the tiniest signs of a crude oil bounce have been enough to spur around a hundred pips in forex gains for the Loonie last week.

Besides, other major economies such as the euro zone appear to be faring much worse than Canada while others like the United Kingdom seem to be done with its glory days. At the end of the day, it really boils down to relative fundamental strength, as the Loonie is actually chalking up its largest losses against the Aussie and Kiwi. Talk about mixing things up! Do you think this mixed forex CAD performance might carry on for the rest of the year?