CAD Conundrum

The fundamental picture in Canada is looking increasingly rosy but the loonie is at the mercy of two factors beyond its control. The yen was the top performer on Monday while the pound lagged. Japan returns from holiday but Chinese and Australian data will be the focus. Ashraf told BNN how Canadian companies are surviving CAD strength in today's BNN interview. 1 CAD remains in progress in the Premium Insights.

The Bank of Canada released its quarter Business Outlook Survey on Monday and it was remarkable for its optimism. The slow-burning commodity bust left Canada vulnerable but the government ramped up spending and now Canada might be turning a corner.

The loonie didn't get much attention in 2016 but it was the top G10 performer after three years of sharp losses. If the optimism in the BOC survey translates into action, more of those losses could be erased in 2017. The survey showed hiring, investment intentions and optimism about future sales at the best levels since Q1 2014. Combine that with Friday's Canadian employment report that showed 54K new jobs, including 81K full time jobs and it's been a dream start to 2017 for CAD bulls.

The problem with betting on CAD is that its future depends on things beyond Canada's border. The first is oil, which fell 4% on Monday on worries about rising North American production. The fall in WTI below $52 takes out an important short-term technical support.

The other vulnerability is just South of its border where the President-elect is prone to criticizing cross-border manufacturing. Despite Canada's commodity status, it also relies heavily on manufacturing exports to the US and in the space of a 140-character tweet, Trump could squeeze NAFTA at any point.

Canada's press reports that senior officials in Trump's team, including his son-in-law have been discussing how to avert a trade war. If the US decides to re-open NAFTA, the ensuing uncertainty might be something like a mini-Brexit for Canada.

In the shorter term, Asia-Pacific traders will be focused on Australian retail sales and Chinese PPI due later.  AUD/USD has gained in four of the past five days including a bullish engulfing candle Monday. Retail sales are due at 0030 GMT and forecast to rise 0.4% m/m.

Chinese CPI is due an hour later and expected to climb 2.2% y/y, down from 2.3%. That's a sweet spot for the PBOC and Chinese economy but we continue to keep a close eye on the yuan and Chinese bond market.