Fundamental Forecast for Canadian Dollar: Bearish

- Inverse Head & Shoulders Points To Upside Potential
- Canadian Consumer Prices Offer Potential Volatility

The Canadian Dollar finished the week on a sour note as it lost ground to the dollar and yen, which retraced earlier losses from QE speculation and intervention respectively. The commodity dollar has also been weighed by a more dovish outlook from policy makers. Concerns over the impact from U.S. weakness and a slowing global economy have led to the BoC lowering their growth forecasts. Bullish, momentum from the central bank’s rate hike carried into the start of the week. Comments following the policy meeting, that financial conditions remain “exceptionally stimulative” signaled that prior tightening wasn’t restricting the flow of credit, opening the door for additional tightening. The upcoming retail sales and inflation reports may impact interest rate expectations going forward and could dictate loonie direction for the upcoming week.

Governor Carney speaking in Berlin on Friday stated that he central bank will set policy appropriate for their inflation target of 2-3%. The lead monetary authority also showed concern over the loonie’s strength as it will have a detrimental effect on demand for exports. The comments weighed on yield expectations as additional rate hikes could lead to further appreciation. Meanwhile, deputy governor Lane speaking in St John’s cautioned that the recovery will be more modest than past cycles. The BoC also holds an unusual uncertainty on the outlook for growth, with the economy having “significant” excess supply. An unexpected fall in July factory sales supported the dimming growth outlook, as the 0.9% decline warned of slumping demand from abroad.

Inflation is forecasted to have accelerated to 1.9% in August with core prices holding at 1.6%, adding to the case for the central bank to pause their tightening cycle. Prior rate hikes should help dampen consumer price growth and allowing inflation to remain within target levels. Meanwhile, an expected 0.5% improvement in retail sales could raise yield expectations in the short-term as strong domestic demand will continue to put upward pressure on prices. However, the impact may be limited given the dovish statements from policy makers, especially of inflation remains below target levels. Despite the packed fundamental calendar, price direction could come from broader trends for the USD/CAD as it is currently holding an 83% correlation with U.S. equity markets.

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