Fundamental Forecast for Canadian Dollar: Bearish

The Canadian dollar finished the week modestly higher against its downtrodden US namesake, but a late-week reversal warns that the Loonie may find it difficult to set fresh highs through upcoming trade. Downbeat commentary from the Bank of Canada likewise hampered the domestic currency and cools outlook for future gains. Overnight Index Swaps showed a noteworthy downgrade in yield forecasts following surprisingly dovish commentary, and the CAD fell in kind. Increased focus on US and Canadian economic data should make upcoming Gross Domestic Product figures especially market-moving for the USDCAD pair.

A correction in previously overextended US dollar/Canadian dollar sentiment could bring further rallies in the days ahead, but it will be critical to watch for market reactions to key GDP releases. Earlier in the week we argued that short covering and a noteworthy pullback in FX Options sentiment suggested that further consolidation was likely. More-recently released Commitment of Traders data shows that speculators indeed scaled back one-sided positioning. It seems increasingly likely that recent lows will hold through the near-term and a test of multi-month range highs near 1.0600 is possible.

The most important foreseeable volatility will likely come on US and Canadian Gross Domestic Product data due Friday, but traders should likewise keep a lookout for surprises in a steady stream of US economic event risk. Releases such as Existing Home Sales, Consumer Confidence, Durable Goods Orders, and Initial Jobless Claims each have the potential of forcing sharp short-term shifts in risky asset classes. Given a positive correlation between the USDCAD and the US S&P 500, we would expect any especially sharp moves in equity markets to translate to the Canadian dollar. Given such sharp moves in the past week of trade, we expect a similarly eventful week of price action in the days ahead.

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