Fundamental Forecast for Canadian Dollar: Bearish

- Canadian GDP Advances Less Than Expected in the Second Quarter
- U.S. Dollar May Continue to Recover Against the Canadian Dollar

The Canadian dollar pushed higher against its U.S. namesake last week, rising some 1.10 percent. Following a disappointing economic activity report for the second quarter, the USDCAD finds support along a rising trend, and now looks poised to reverse course and test recent highs. With the passing of the U.S. nonfarm payrolls report, traders will now shift their focus to the Bank of Canada interest rate decision for next moves in the pair.

Canadian economic activity in the second quarter advanced 2.0 percent during the three months through June, which missed economists’ expectations of 2.5 percent, with net trade contributing negatively to growth. In turn, the USDCAD lost ground subsequent to the report as expectations scaled back that the first G-7 member to raise its key overnight lending rate since the global financial crisis will hike rates another twenty five basis points next week. As of late, market participants are pricing in a fifty six percent chance that the central bank will increase borrowing costs on September 8th to 1.00 percent. Despite growth expectations not meeting forecasts, the fundamental outlook leading up to the BoC rate decision provides reasons for continuing optimism. During the recent business outlook survey, hiring intentions seem to remain intact despite the unexpected decline in July. Continuing hiring by the private sector bodes well for household spending in conjunction with allowing Canadians to reduce their personal bankruptcies, which is positive for overall growth.

Besides the Bank of Canada interest rate decision this upcoming g week, CAD traders also face the employment report. The labor force in the loonie is forecasted to rebound from July’s decline of 9.3K to advance 25.0K in August, while the unemployment rate is surveyed to remain unchanged at 8.0 percent. Market participants should keep a close eye on the full time employment component. Last month, this reading plunged 139K, while part time service jumped 129K, a signal that companies feared committing to adding additional persons onto their payrolls. A report next week illustrating gains in both part and full time employment with the data skewed to the latter may fuel CAD price action if policy makers the previous day are hawkish. Not to overlook, housing prices and building permits are also on tap.

With regards to price action, the USDCAD looks to have worked its way into an ascending channel, which has remained intact since the beginning of August. At the same time, the pair has broken below the 38.2 percent Fibonacci retracement on the April 21st to May 25th upswing to test the 50.0 percent level. Thus, until we see a clear break below the lower bounds of the range, upside price action will likely persist, with a test back towards 1.0625.

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