[DanRath]

A bullish call is retained on the CAD, notwithstanding the recent pull-back which appears to be more of a sentiment / risk move rather than anything linked to Canadian fundamentals.

Over the last week CAD has underperformed, with USD/CAD rising to its highest level in a month at 1.1650, and with CAD falling against all the other majors as well. The majority of the decline came over the last couple of days, a time where we had absolutely no data or major news out of Canada, and an extremely quiet US calendar as well. The risk aversion and USD safe-haven flows appear to account for part of the move, but we did see Bank of Canada Governor Mark Carney continue to raise questions last week about the prior CAD strength as a factor that the BoC was monitoring.

In one respect, the CAD did have an extraordinary run over the last two months (when the USD really started to fall), as USD/CAD dropped from about 1.2500 to 1.08 in nearly a straight line move. In May we saw the highest-ever monthly return for CAD, and CAD was actually the top-performing currency on a trade-weighted basis in the weeks after the USD started falling. And while some still think that CAD will hit parity with the USD by year-end, economic and financial data never move in a straight line for long, so the correction that has unfolded is not a total shock.

On both a trade-weighted basis and against the USD, CAD has now taken back about 50% of its gains since mid-April, and it looks to us like the correction has more or less run its course. However, for the remainder of 2009 the currency moves could be pretty choppy, given the extreme uncertainty about the sustainability of any signs of recovery; you would expect to see more of the “two steps forward, one step back” types of moves.

It’s a relatively quiet data week ahead with just one top tier release hitting the screens. The April GDP figures will help clarify the extent to which the recession has unfolded into Q2, and any upside to that result would help see CAD regain favour with the markets.

[DanRath]

There is again no Canadian data, and the near-term USD/CAD outlook might cause a few furrowed brows at the BoC who were likely much relieved to have had a sizeable positive gap between spot USD/CAD and 1.10. Today is dominated by news on the health of the US consumer, and though none of the data releases are key, they will give a reading on the pulse of the consumer side of the US economy. No small matter as over 70% of the US economy is dependent on an eagerness and ability of Americans to spend, spend, spend. May personal income and spending are due and each are expected to be up 0.3%. Resist any temptation to deem such an outcome a “green shoot.” A 0.3\% gain income would still result in the first negative y/y print on personal income since at least 1960. In fact, compensation has been negative y/y for the past two months, again something unheard of since 1960, and largely due to a slide in private sector pay packages. The only reason that disposable income remains in positive y/y territory is because of transfers from the government, which can’t become a longterm source of spending power. (Where’s my stimulus cheque?) And there is precious little good news on the employment front. Instead, given that record numbers of jobless are exhausting their unemployment benefits, if anything, the outlook seems as challenging as at any time in the current crisis.