Canadian Dollar May Change Course as Growth and Inflation Falter


[B][B]Canadian Dollar May Change Course as Growth and Inflation Falter [/B][/B]

[B]Fundamental Forecast for Canadian Dollar: [/B][B]Bearish[/B]

The Canadian dollar strengthened against its currency counterparts this week as oil prices pushed back above $70 a barrel however, the USD/CAD may continue to trend sideways over the following week as the economic docket is expected to reinforce a weakening outlook for the world’s eighth largest economy. At the same time, Credit Suisse overnight index swaps show investors are pricing a 100bp rate hike over the next 12-months as the Bank of Canada anticipates economic activity to contract at a slower pace than initially expected, and the rise in the interest rate outlook may continue to drive the dollar-loonie lower over the near-term as market participants see a risk of a slower recovery in the U.S. Taking a look at USD/CAD price action, the currency pair failed to cross back above the 50-Day SMA after stalling at a high of 1.1127 on Monday, and retraced the advance from the second week in August to reach a low of 1.0820 by the end of the week. The sharp pull back may follow into the week ahead as market participants raise their outlook for global growth but nevertheless, as the dollar-loonie holds above 1.0792, the August 13 low, we may see the pair maintain its current range over the following week as investors weigh the outlook for future policy.

The economic docket for the following week is expected to reinforce a weakening outlook for future growth as economists forecast retail sales to fall 0.1% in June, and households may continue to cut back on consumption and increase their rate of savings as labor demands falter. Moreover, the current account deficit is anticipated to widen to 11.8B from 9.1B in the first quarter as global trade conditions remain weak, and fears of a slower recover in the U.S., Canada’s biggest trading partner, may lead businesses to scale back on production and employment throughout the second half of the year in an effort to lower their cost structure. At the same time, producer prices are projected to fall 0.5% in July, while the cost of raw materials are anticipated to drop 0.5% from June, and the weakening outlook for price growth may hamper the prospects for a rate hike next year as the BOC maintains a dovish outlook for inflation. As growth and inflation falter, the central bank may ease policy further in the coming months and look beyond the interest rate to support a sustainable recovery as the board ‘retains considerable flexibility in the conduct of monetary policy,’ and the BoC may attempt to stem the appreciation in the exchange rate over the coming months as the outlook for the global economy remains highly uncertain. - DS