Fundamental Forecast for Canadian Dollar: Neutral

- Canadian GDP for May grew by 0.1% missing expectations of 0.2%
- Raw materials price index unexpectedly declined 0.3% against forecasts for a 1.0% increase

The Canadian dollar advanced for a consecutive week as markets continue to feel bullish about the global economy. A light economic calendar left direction at the mercy of broader trends which saw ebbs and flows in risk sentiment lead to “loonie” volatility as mixed fundamental data and corporate earnings left traders guessing. Ultimately, solid results from blue chip names the week prior and dissipating concerns over the banking system in Europe where enough to keep traders upbeat. The one fundamental release of note was the May GDP report which showed the economy grew 0.1% but missed forecasts for a 0.2% gain. Signs that growth is stalling in the post credit crisis outperformer could dim the outlook for further tightening. Indeed, the BoC held a decided dovish tone following their July rate hike which had already weighed on yield expectations.

Despite Governor Carney stating that further moves will be “weighed carefully”, markets are still pricing in a 68% chance of a rate hike. Overnight index swaps are looking for another 75 bps in tightening from the central bank over the next year. Therefore, the potential for additional tightening could remain a supportive tractor for the Canadian dollar. However, policy makers remain concerned that slow U.S. growth and the end of the inventory cycle could begin to stall demand for exports dragging the domestic economy lower. Therefore, a September rate hike remains in the balance and signs that global growth is slowing and the U.S. labor market continuing to struggle could lead markets to price out the additional hikes and sinking the commodity dollar.

The coming week’s calendar will be much more meaningful with the employment and Ivey PMI reports for July crossing the wires. The Canadian economy is expected to have added another 10,000 job during the month following the robust 92,000 the month prior. The slower pace of job growth could weigh on the outlook for domestic growth, but a seventh consecutive monthly gain would indicate sustainable strength. However, the manufacturing sector is forecasted to slow to 55.5 from 58.9 the month prior and a greater deceleration in growth could significantly reduce yield expectations weighing on the “loonie”. The U.S. labor report at the end of the week could impact price action for the com-dollar as further job losses in the global economy will impact he outlook for global growth.

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