Fundamental Forecast for Canadian Dollar: Neutral

- Canadian Dollar Outperforms, New Zealand Dollar Remains Under Pressure
- USDCAD Could Continue Higher Through Recent Trade

The Canadian dollar looks to have extended last week’s rally against the U.S. dollar, finishing as the third best performing G-10 currencies through Friday’s close. Strong rallies in crude oil prices fueled the USD/CAD advance and sent it to the lowest level since June 19th. However, looking at the daily chart, the pair continues to make higher lows since April. Indeed, the Bank of Canada hiked rates twenty five basis points last week to 0.50 percent in May from .025 percent the previous month after maintaining the lending rate near zero for more than a year. With a light economic docket this past week, and a disappointing nonfarm payroll report in the U.S., CAD traders sent the loonie to the lowest level in two weeks against the greenback.

The economic docket in Canada this past week was fairly mute as traders were faced with non-market moving events, but are worth noting. Housing price index for the U.S.’s largest trading partner rose 0.3 percent in April, which was in line with economists’ expectations. It is significant to follow this index as the reading is a component of inflation that measures changes in prices for new homes. Meanwhile, housing starts in the region rose to 205.0K in May from a downward revision of 200.7 the previous, a signal that growth in housing construction is gathering strength. However, what set the tone for CAD bullish price action was the disappointing reading in nonfarm payrolls. The U.S. economy added 431,000 jobs in May, significantly lower than economists’ forecasts for a 536K jump. Adding further weight onto the reading was the gain in census workers as temporary employment surged 411,000.

Looking ahead to this week, the economic docket is forecasted to show new motor vehicle sales slump 5.0 percent, marking the third decline in the past four months, while wholesale sales is surveyed to expand 0.3 percent for the month of April. On the other hand, leading indicators highlights the calendar for the loonie, with economists’ expecting the reading to rise 0.7 percent. A reading in-line or exceeding expectations will surely add onto the improved outlook for the region as movements in leading indicators are known to precede larger developments in the rest of the economy. However, despite the strong fundamental base that Canada has outlaid, traders should not overlook policy makers pausing rates next month as European woes continue to rattle the markets.

Thus far, negative spillover effects to Canada have “been limited to a modest fall in commodity prices and some tightening in financial conditions,” the central bank said after announcing rates last month. Going forward, investors are pricing in a seventy two percent chance that the Bank of Canada will hike rates twenty five basis points at its next rate decision on July 20th. With regards to price action this upcoming week, we may see a lackluster performance amid a quiet economic docket, while price action for the USDCAD as of Friday close looks to have stalled at the 50-day SMA. However, market participants should shift their focus to developments in the U.S. as the economic docket in the world’s largest economy is expected to show consumer prices accelerating 2.0 percent. Moreover, traders should keep a close eye on moves in crude oil prices as they remain highly correlated to the USDCAD.

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