Here is the fundemental picture painted by Commerzbanks Daily Currency Report:
The loonie hasn’t managed to benefit from a US dollar being under
pressure globally and a rather cautious sentiment versus the future
performance of the greenback. Despite strong employment growth in
October, the market fears a strong correction in the Canadian housing market
– recent building permits and the housing price index saw a dramatic drop -
and negative effects of a slowdown of the US economy on Canadian exports.
The recent fall in oil prices hasn’t helped the loonie as a commodity currency
either. Foreign investments dropped by $3.1bn in September, mostly due to
equities. However, there is a real risk that capital outflows will continue since
at the end of October Finance Minister Flaherty had announced that income
trusts would have to pay taxes. He repeated yesterday that the government
would issue guidelines on how income trusts could operate during a four-year
tax-moratorium that ends in 2011. Moreover, Governor Dodge sees low risks
to the world economy and a continued benign environment and thinks that
Canadian interest rates are appropriate, which indicates that rates are likely
to have reached a peak – a fact that may be confirmed tomorrow with low
October CPI readings. All in all not a positve mix for the loonie, which may
slip towards 1.1500-20 USD/CAD today on weak retail sales. The CAD may
have to go through more weakness until the end of the year, but
fundamentals remain firm (c/a and budget surplus in particular) and should
support the CAD over time.