Canadian loonie lost ground against the United States dollar and Japenese Yen today following mixed fundamental data, and a drop in oil. The market consumed data from Canada’s housing sector as well as the Bank of Canada’s Business Outlook Survey, which is released quarterly. The fundamental data was mixed and speculation over Canada’s economy recovery continued, especially after last week’s disappointing employment data. Canadian building permits fell -4.6 percent in November versus an expected fall of only -2.6 percent, a decline attributed to decreases in non-residential building permits. Meanwhile, residential permits rose 9.1%. CAD’s losses put the currency into an area I refer to as bargain hunting territory, giving me something to ponder for today’s post.

Taking a holistic look at CAD, the fundamental and technical pictured combined isn’t that bad. The business survey points out that more than 70% of firms surveyed expect their sales volume to increase over the next twelve months. Other interesting tidbits from the survey include the following:

• 42% expect higher machinery and equipment spending.
• 54% expect their employment levels to be higher.
• 42% expect prices of products or services purchased to increase.
• 38% expect prices of products or services sold to increase.
• 61% expect an inflation rate of 1 to 2 percent.

The inflation data is interesting considering almost half of the firms surveyed believe their cost of goods sold will increase, but only 38 percent expect to pass that on to the consumer.  The Bank of Canada points out that while firms expect output prices to grow at a faster rate than the last twelve months, some firms may have trouble increasing prices to match the higher cost of goods.

“On balance, firms also expect their own output prices to grow at a faster pace than over the past 12 months. For many firms, this reflects the end of a period of price discounting, as they plan to keep prices stable or try to partly reverse past discounts to restore profit margins. Some firms plan to pass on part of the higher cost of inputs to customers, although, for others, the ability to raise prices is limited, given soft market conditions.”

-          January 2010 Business Outlook Survey, Bank of Canada

Overall, the survey suggests that Canadian executives are rather optimistic about the next twelve months.

Sweet, Sweet Crude

Another interesting chart related to Canadian dollar is the West Texas Intermediate Crude daily chart. Last week WTI broke through resistance at $82, and today $82 is being tested as support. Should $82 hold and oil continue higher, loonie may benefit.

Data on Tap

Tomorrow Canada will see Trade Balance data, which is expected to show a positive gain. The market also expects to see trade data from the United States which makes me more interested in CAD/JPY than USD/CAD today.  Both USD/CAD and CAD/JPY have moved into what I call bargain hunting territory, but CAD/JPY would be free of fundamental influence from the dollar. Trading cross pairs to remove fundamental pollutants is something I talk about in my book, Making Money in Forex. The next twenty four hours could provide a decent example of this process in action.

Of course, I could be totally wrong. It is hard to ignore the speed of today’s CAD/JPY sell off. Today’s price action wasn’t a meandering Sunday stroll into bargain hunting land, rather it was fierce 100 pip slaughter fest taking only five hours to fall.

Best of luck,

Ryan