Declining Business Sentiment Generates Headwinds for the Loonie

Posted On 30 Dec 2014
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The Canadian dollar remained stable on Tuesday despite continued pressure on other Canadian assets do to the recent rapid decline in oil prices. A small business survey showed that sentiment took a hit, as the economy could falter as energy continues to face headwinds.

Canada’s small business outlook was depressed by falling oil prices, according to the CFIB’s Business Barometer survey which fell 4.0 points to 61.9 in December from 65.9 in November. Notably, the oil price drop has promptly weighed on sentiment while any boost to the outlook has yet to emerge. Regionally, sentiment contracted in 8 of 10 provinces.

Yet, the report did note that employment plans and the number of owners who reported their businesses to be in good shape held steady, suggesting that recent events are “flagging caution” on the outlook for real business activity. The report highlights the well know negative implications for Canada’s economy from the oil price drop, with weaker prices seen reducing GDP by 0.3% next year according to Bank of Canada Governor Poloz.

The plunge in oil prices into year-end is depressing world inflation, and the dollar’s rise with the approach of the Fed’s exit is exacerbating the U.S. inflation drop. Real consumption will get a boost from lower prices, with a magnified U.S. effectfrom dollar strength and a lower trade deficit, though the mining-sensitive factory sector will take a hit. The oil price plunge mostly reflects OPEC’s effort to sustain market share, as the drop is too large to be explained by sluggish world growth.

The USD/CAD is trading near the recent highs, near the 10-day moving average, although momentum has stagnated. The MACD (moving average convergence divergence) index is printing a zero index reading. The relative strength index (RSI) is printing a reading near 61, which is on the upper end of the neutral range, but has recently declined reflecting consolidation.

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