Fundamental Forecast for Canadian Dollar: Bearish

- Canadian Retail Sales disappoint markets
- Technical studies suggest Canadian Dollar may lose further

Pronounced US dollar weakness meant that the Canadian dollar finished the week higher against its namesake, but the Canadian currency underperformed all other G10 counterparts and relative weakness suggests risks remain to the downside in the week ahead. Relative disappointments in Canadian Retail Sales and Consumer Price Index data affected market expectations for the future of domestic interest rates. Overnight Index Swaps now price in a 20 percent probability that the Bank of Canada will raise interest rates at their next meeting—down from a 50 percent chance at the end of last week. Bearish US dollar momentum suggests that the USDCAD could fall further, but the Canadian dollar’s inability to capitalize on Greenback weakness raises risks of upward correction in the USDCAD.

A relatively empty week of Canadian economic event risk means that the USDCAD will likely trade off of US economic developments and moves in very highly correlated Oil prices. A potential exception comes in the form of monthly Canadian Gross Domestic Product data due the morning of the 30th. Though the month-on-month GDP figures are not known to move currencies, recent focus on Canada’s economic fundamentals may make any surprises market-moving. On the US economic docket, a slew of end-of-month economic data could potentially alter forecasts for US growth and affect financial markets.

The Canadian dollar previously rallied against the Greenback and other major currencies on evidence that it was decoupling from a slowed US economy and showed solid growth prospects. Yet more recent economic data reminded markets that Canada remains fairly sensitive to economic developments in its southern neighbor. Disappointments in US economic data would likely force the USDCAD lower, but any especially strong surprises would likely mean that the Canadian dollar could continue underperforming against other major counterparts.

As it stands, it is difficult to call for substantial US dollar recovery against any major currency. Yet the Canadian dollar may continue to underperform more broadly as markets digest a relative slowdown in Canadian economic recovery. Such underperformance would likely mean that the USDCAD continues to trade in a wide range through the foreseeable future.

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