Fundamental Forecast for Canadian Dollar: Bearish
 
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The Canadian dollar continued to pare the advance from the previous month following the flight to safety, and risk trends are likely to dictate price action for the USD/CAD over the following week as the economic docket remains fairly light for the last full week of August. The dollar-loonie broke out of the broad descending triangle from the yearly highly (1.0851), with the exchange climbing to a fresh monthly high of 1.0513 on Friday, and another push to the upside could lead the pair to test July high at 1.0676 as market sentiment falters.

However, the loonie displayed little reaction to the July price growth report, which showed a weaker-than-projected CPI reading paired with an unexpected drop in the core rate of inflation, but easing price pressures could lead the Bank of Canada to adopt a wait-and-see approach at its next meeting in September as the central bank lowers in growth forecast and holds a cautious outlook for the economy. Accordingly, market participants may scale back expectations for another rate hike next month as BoC Governor Mark Carney maintains a neutral tone for future policy, and the uncertainties surrounding the outlook for global growth could lead the central bank to support the real economy throughout the remainder of the year. According to Credit Suisse overnight index swaps, investors are pricing a 44% chance for the central bank to increase the benchmark interest rate to 1.00% in September, while market participants expect to see just one more rate hike over the next 12-months, and the drop in interest rate expectations could stoke further weakness in the Canadian dollar as traders weigh the prospects for future policy.

Nevertheless, the economic calendar for the following week is expected to show a 0.3% rebound in retail sales following the unexpected 0.2% contraction in Mayas the labor market continues to improve, and households may look to increase their rate of consumption going forward as the recovery gathers pace. As a result, the ongoing expansion in economic activity could lead the BoC to normalize policy further over the coming months, and Governor Carney may gradually raise the interest rate in the following year as the central bank aims to balance the risks for growth and inflation.

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