Fundamental Forecast for Canadian Dollar: Bearish

Many assets and currencies have suspended their meaningful connections to economic and financially-based fundamentals in order to follow speculative biases. The Canadian dollar is no exception to this role. If it wasn’t for the constant selling pressure on its US counterpart, the Canadian currency would likely flounder and cave under its own discouraging forecast. However, with speculative seeping out of the US financial boarders, much of the flow is finding its way to the familiar and stable arms of Canadian assets. In this way, the US and Canadian dollar relationship is much like that between the Euro and Swiss franc. However, this bond can be prove itself just as burdensome as it has been beneficial.

Looking at the engine behind the dollar’s demise, it isn’t very difficult to come to the role that Fed stimulus speculation occupies. And, after five weeks of pricing in a potential expansion of monetary policy; the market should be reasonable close to a fair value level that reflects the impact that such a move would have. That being said, if this significant fundamental development has been priced in, the natural leverage for loonie buying through greenback selling may dry up. Furthermore, as this catalyst’s influence fades, other elements will step in to influence push the currency one way or another. Another catalyst for the USDCAD pair specifically could be the general showing of the US 3Q earnings season. Strong revenues for US blue chips would likely encourage further capital investment which naturally translates into orders for Canadian manufacturers. Beyond that, the US earnings season has proven a spark for global risk appetite trends in the past; and it could certainly offer the same this time around.

Assuming that the US dollar is steady and earnings don’t come into play, the Canadian currency will have its own fundamental markers to follow. Top event risk next week is the Bank of Canada’s rate decision. Economists believe that the central bank will hold at 1.00 percent but the market is still pricing in a 20 percent chance of a 25 bps hike. From this, we can see that there is some level of hold out by the speculative community that the loonie will join its Australian and New Zealand counterparts as a high-yield currency. A dose of reality here would not likely go down well for bulls. We saw at the past meeting that the policy authority was set in its wait-and-see approach; and they further stated their concerns about the country’s economic health and financial stability. We will likely see the same this time around; and if traders don’t pick up on it in the statement, they will see it repeated in the Monetary Policy report the following day. Aside from this event, leading indicator, CPI and retail sales are top-tier indicators to take note of.

DailyFX provides forex news on the economic reports and political events that influence the forex market.