Fundamental Forecast for Canadian Dollar: Bearish

The Canadian dollar lost ground against the greenback, with the USD/CAD bouncing back from parity, and the exchange rate may continue to push higher over the following week as it carves out a double-bottom around 1.0000. As the dollar-loonie continues to trade within the downward trending channel carried over from the previous year, the range-bound price action in the exchange rate could drive the pair back towards the upper bounds around the August highs if we see the short-term rally gather pace.

At the same time,the pair could consolidate over the following week as price action fails to cross back above the 20-Day SMA at 1.0146, and the exchange rate may trend sideways over the near-term as market participants speculate the Bank of Canada to maintain a wait-and-see approach going into 2011. Credit Suisse overnight index swaps shows investors are only pricing a 4% chance for a 25bp rate hike in December as the central bank maintains a cautious outlook for the region, and the central bank may talk down speculation for higher borrowing costs as the economic outlook remains clouded with uncertainties.Given the close fundamental ties between the U.S. and Canada, BoC Governor Mark Carney said that the tepid pace of recovery in the world’s largest economy has raised the downside risks for region, and the central bank may refrain from normalizing policy further as the Fed embarks on additional monetary easing. Accordingly, the BoC may hold borrowing costs steady at 1.00% over the coming months as it aims to balance the risks for the region, which could stoke increased weakness in the Canadian currency as interest rate expectations falter.

As the economic docket for Canada remains fairly light for the following week, risk trends are likely to dictate price action for the dollar-loonie, but the bullish sentiment behind the greenback may gather pace over the following week if the flight to safety heightens over the days ahead. Nevertheless, manufacturing sales in Canada are forecasted to slip 1.0% in September, while wholesale spending is projected to weaken 0.1%, and the pullback in private consumption could spark a bearish reaction in the loonie as growth prospects deteriorate.

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