[B][B]Canadian Dollar May Lose Ground as Productivity, Price Pressures Falter[/B][/B]
[B]Fundamental Forecast for Canadian Dollar: [/B][B]Bearish[/B]
- Bank of Canada Holds Rate Steady, Trade Deficit Widens
- Canadian Housing Starts Surges Higher in August
- New House Prices Unexpectedly Rise in July
The Canadian dollar advanced against the greenback, with the USD/CAD slipping to fresh monthly low of 1.0673 earlier this week, and pair may continue to hold below the 20-Day moving average (1.0898) over the following week as investors hold an improved outlook for the world’s eighth largest economy. However, as economists forecast the capacity utilization rate to fall to a fresh record-low in the second quarter, with the annual rate of price growth expected to fall further in August, fears of a slower recovery may weigh on the exchange rate as the outlook for growth and inflation remains weak.
Meanwhile, the Bank of Canada held the benchmark interest rate at 0.25% earlier this week and pledged to maintain borrowing costs at the record-low throughout the first-half of 2010 as price growth remains subdued however, the central bank reiterated that the recent appreciation in the exchange rate could hamper the prospects for a sustainable recovery as trade conditions falter. At the same time, the BoC said “growth in the second half of 2009 could be stronger than the bank projected in July” as the government takes unprecedented steps to steer the nation out of recession, and went onto say that it retains “considerable flexibility” for monetary policy even as the key rate remains at its lowest level since the central bank was established in 1934. Moreover, Finance Minister Jim Flaherty said policy makers have a “limited” number of tools to stem the appreciation in the domestic currency, and went onto say that the government, in conjunction with the Bank of Canada, may take steps to maintain a floor on the exchange rate as he sees a risk for a double-dip recession. Nevertheless, as the board anticipates the annual rate of inflation to hold below the 2% target until the second-quarter of 2011, weakening price pressures may hamper long-term expectations for higher borrowing costs, and a pull back in the interest rate forecast is likely to drag on the Canadian dollar as investors weigh the outlook for future policy.
The economic docket for the following week is expected to show the capacity utilization rate fall to a record-low of 65.5% in the second quarter from 69.3% during the first three-months of the year, while consumer prices are anticipated to fall at an annual rate of 0.6% in August. Moreover, the core rate of inflation is forecasted to weaken to an annualized pace of 1.6% from 1.8% in July, and the downturn in price growth is likely to hamper the prospects for a rate hike next year as the central bank maintains a dovish policy stance. - DS