Loonie Outperforms its Risk Peers

Commodity prices are giving the loonie a leg up, allowing the currency to push away from its five months low printed earlier this morning on the back of ballooning Euro-yields. US data this week has beaten all analysts’ expectation and Canada has benefited by associate. The US is Canada’s largest trading partner with +70% of its exports crossing south of the border. Once again the market is viewing the CAD as a commodity and growth play currency “that’s temporarily swayed by risk aversion”. Despite outperforming most of its larger trading partners, the currency is little changed today.

For the time being, the market is back trading a defined and contained trading range, dictated by sovereign interest on top and corporate bids below. With gold prices under pressure, the EUR for sale on rallies, the currency outright will remain vulnerable right hand side as the EURO sovereign crisis enters a questionable and threatening new period for policy makers. A breach of the recent dollar highs should create some room for the dollar to move, despite the loonie outperforming the other risk and growth sensitive currencies (CAD vs. AUD +1.7% this month).

The currency has little “other” data to contend with ahead of the CPI release on Friday. The market does not expect any surprises that could provide the BoC with any concerns regarding their present policy path. The dollar remains better bid on pullbacks (1.0208).

The Aussie dollar is not trading with the same enthusiasm as some of the other growth and interest rate sensitive currencies. The pick of the bunch has been the loonie, guilty by association to stronger US data. For most of this week the AUD has dropped in sympathy with the EUR. Its largest trading partner, China, can do very little to protect growth and risk sensitive currencies in this environment. Especially in a market that is concerned with Italy following Greece, Portugal and Ireland down that slippery slope to first-aid.

Risk currencies all week have been trading in a relatively tight trading range with one eye focused on the European debt market. When yield spreads balloon, risk assets are sold. This trading environment seems to be accepting some type of inevitable as price action is rather dull in the North American sessions.

Data earlier today showed that Aussie wage costs were easing. Their wage price index rose +0.7% in Q3 from the previous three months, when it gained +0.9%. This price pullback will not likely impede any further easing intentions from the RBA. Futures traders are now pricing in a -153bp rate cut by the RBA over the next 12-months (+4.50%).

The RBA minutes this week suggest that the market is unlikely to get a follow-up cut in December. The decision was made on balance for a modest easing. Analysts are interpreting any movement as “being a gradual process”. Commercial bids and a market appetite for gold on dips have slowed down the selling of the currency. In this current environment, the market remains a better seller of the currency on relief rallies, expecting to see parity sooner rather than later (1.050).

Other links:
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