Canadian dollar to face pressure as Canada seen as 'out of step' with improving global confidence

Last Updated on Monday, 09 January 2012 12:22 Written by Will Peters Monday, 09 January 2012 12:19

The Canadian economy faces headwinds, pressure is brought to bear on the Canadian dollar via the possibility of an interest rate cut.

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The Canadian dollar has failed to capitalise on improved risk sentiment on the currency markets this morning as would have been the case in weeks prior.

The reason? Exchange rate markets are focusing on fundamental economic data once more.

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While Friday saw good US job data being released, Canada saw a set of pretty depressing statistics coming out of their job market.

It is believed that further interest rate cuts at the Bank of Canada (BoC) are likely in the current economic environment.

Canadian interest rates are expected to be held at 1.0% at the upcoming policy meeting on 17 January, as they assess the emerging strength of the US economy.

Bank of America have today said that they see the next move from the BoC being a cut in light of weakening sentiment:  

"While the Canada PMI echoed improving sentiment seen around the world, several confidence surveys ended the year on a somber note.

"A survey just released by the Economic Club of Canada reveals a significant drop in sentiment in Canada, with the survey result rivaling the weakest since the 2008
recession. Indeed, 70% of respondents think the economy has already entered recession. This corroborates the 6% mom slide in consumer confidence in December to levels last seen in April 2009.

"Changes in sentiment do not always translate into equal shifts in buying and investing behaviour, but swings of this size could be a drag on job growth, capex and consumer spending. At a minimum the reports suggest the Canadian economy is somewhat out of step with the recent supposed improvement in confidence around the globe."

Looking ahead an upcoming report on Ontario government finance will bear watching.

The Drummond Report on Ontario budgets is to be released in the next couple of weeks.