Fundamental Forecast for Canadian Dollar: Bearish

The Canadian dollar pushed higher against the buck this past week, climbing some 0.66 percent on the back of greenback weakness and a positive economic activity report. With a relatively light economic docket, CAD price action will likely be dictated by U.S. economic release as market participants await the FOMC rate decision and the nonfarm payrolls report as quantitative easing concerns lingers amid a weakening economic outlook in the world’s largest economy.

There was little influence this past week to push the Lonnie higher against the buck other than market uncertainty. Anticipation of U.S. gross domestic product ahead of the FOMC rate decision this week sent the currency markets in a frenzy, but when released, currency traders faced an inline report, which only fueled volatility as speculation of the reports implications towards QE were uncertain. The rate decision next week is of particular importance for the loonie due to the fact that the U.S. is Canada’s largest trading partner. However, whatever the outcome is, the U.S. dollar will face extreme precariousness, and we will in turn need to digest the report and let price action settle before making a case of direction in the subsequent days. CAD price action doesn’t solely lie on U.S. fundamentals. This past week, economic activity in Canada reversed July’s decline and advanced 0.3 percent in August to mark the highest reading since April of this year, which was widely expected. Earlier this month, Finance Minister Jim Flaherty said that further moves in the Bank of Canada’s interest rate decision would be “carefully considered” after policy makers hike rates three successive meetings prior to October.

For this upcoming week, the economic docket is fairly muted as the only noteworthy release will be the Canadian employment report. As of late, economists are forecasting a 15.0K jump in the labor force, while the unemployment rate is forecasted to remain unchanged at 8.0 percent. At the same time, the breakdown of the report is expected to show full time employment climbing 30.0K. The reading is of great significance because higher employment usually leads to increased consumption and expenditures, and in turn will lead to consumer prices to advance. Inflationary pressures will then lead the Bank of Canada to consider raising rates again. With regards to crude oil, the commodity has worked its way into a descending channel, and now looks poised to crossover below the rising trend line, which has remained intact since the middle of September. A break below these bounds may validate further downside risks in the near term. We continue to monitor crude oil prices for the reason that Canada is the seventh largest producer of oil in the world. Thus a rise in the energy commodity bodes well for the economy and vice versa.

In the currency markets, the USDCAD extended yesterday’s losses but downside risks look to remain capped by the 20-day moving average, while the MACD has yet to crossover to the side. It is noteworthy that the pair has recently tested parity, and quickly reversed course. Until price action breaks and closes below 1.00, upside risks remain.

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