US News To Drive Canadian Dollar Price Action

Canadian Dollar price action will be driven by political developments across Canada’s southern border.

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

  •     [Retail Sales rose for the fifth consecutive month in July](http://www.dailyfx.com/story/currency/cad_fundamentals/Canadian_Dollar__Australian_Dollar_Up1222122962165.html), led by furniture, building supply, and pharmacy sales
    
  •     [Consumer Price Index numbers see pick up in inflation pressures](http://www.dailyfx.com/story/currency/cad_fundamentals/Australian__Canadian__and_New_Zealand_1222211201009.html), rising to a 5 year high at 3.5%
    

Canadian Dollar price action will be driven by political developments across Canada’s southern border. The monthly Gross Domestic Product reading is easily the most significant item on the docket, with expectations calling for the economy to expand 0.2% in July versus 0.1% in the preceding month. Leading indicators leave the door open for a downside surprise: Retail Sales growth slowed to 0.1% in July from 0.6% in June while employers cut 55,200 jobs in response to slowing demand in the United States. Trade figures reveal a more optimistic picture of consumption as imports rose 4.6% in July, led by a 9.5% spike in inbound shipments of automotive products (mostly new cars). Still, exports grew just 2.2% in the same period, meaning the trade component will be net negative contribution to the overall GDP figure. The August editions of the Industrial Product Price and Raw Materials Price indices are expected to contract -0.5% and -3.0%, respectively. Both figures will reflect the sharp decline in oil prices. Indeed, crude fell nearly 22% through August 31st from the peak at over $147/barrel in mid-July. For Canada, oil is a key export as well as production input.

On balance, Canadian dollar price action is most likely to take cues from developments in the United States as lawmakers went into the weekend without a final agreement on the proposed $700 billion dollar rescue plan to shore up financial markets. Congressional leaders were narrowly within reach of a consensus on Thursday, but talks broke down after Republican members of the House of Representatives dissented. A compromise plan was reportedly in the works on Friday that would give the Treasury the ability to offer insurance to troubled firms rather than buy out their bad debt outright. The forex markets have been generally flat as traders would not commit to positions without knowing what the final outcome will look like. Assuming the markets judge the final version of the plan as meaningfully helpful, the greenback is likely to lose ground initially as those investors that had cashed out of stocks on risk aversion begin to return. However, this initial reaction is then likely to give way to the broad macroeconomic forces supportive of long term US dollar strength as bond yield forecasts call for slight monetary easing by the Bank of Canada even as the Federal Reserve boosts borrowings costs over the course of 2009.