Fundamental Forecast for Canadian Dollar: Neutral

- US Dollar Canadian Dollar Exchange Rate Forecast
- The Climb in Risk Appetite and Carry Interest Still Exposed to China, Europe and Speculative Runs

The Canadian dollar tumbled lower on Friday following an unexpected drop in employment, and the currency could face increased selling pressures over the following week as the economic docket is expected to reinforce a weakened outlook for future growth. The labor market in Canada weakened for the first time this year as the economy unexpectedly shed 9.3K jobs in July, led by a 139K drop in full-time positions, and the data suggest that the recovery is starting to lose pace as the governments starts to normalize monetary and fiscal policy.

As the USD/CAD fails to test parity, with price action holding above 1.0100, the pair may retrace the sharp decline carried over from the previous month as the prospects for future growth deteriorate.However, as the sharp rebound on Friday fails to break above the 100-Day SMA at 1.0306, with the 50-Day SMA crossing below the 200-Day SMA at 1.0398, the technical developments continues to favor a bearish outlook for the exchange rate, which could lead the dollar-loonie to make another run towards parity over the near-term.At the same time, investors may scale back speculation for the Bank of Canada to normalize policy further this year as the central bank lowers its growth forecast and sees the economy operating below full-capacity until the end of 2011, and Governor Mark Carney may adopt a wait-and-see approach as he expects expansion in private sector spending to taper off. Nevertheless, the event risks scheduled for the following week is expected to show housing starts weaken to an annualized pace of 184.0K in July from 189.3K in the previous month, which would mark the slowest pace of growth since December, while the new housing price index is forecasted to increase 0.3% for the second consecutive month in June. As the government stimulus fade, with the economic recovery losing pace, the central bank may look to talk down speculation for a rate hike at its next policy meeting September, and may keep rates on hold throughout the remainder of the year as it aims to balance the risks for the region.

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