Fundamental Forecast for Canadian Dollar: Neutral

The Canadian dollar lost ground against its U.S. namesake this past week, falling some 0.44 percent. The decline may be short lived as CAD traders shift their focus to the Canadian interest rate decision. At the same time, crude oil looks poised to continue its northern journey as the commodity pushes higher on the back of domestic and global growth, while finding support at the 20-day SMA.

Canada’s interest rate decision highlights the economic docket for the region this week following a relatively muted calendar. As of late, economists are forecasting prices to slow an annualized 2.3 percent in November from 2.4 percent the month prior, while the core rate is expected to slow from 1.8 percent in October to 1.6 percent. Ahead of the release, traders are pricing in a sixteen percent chance that the central bank will raise borrowing costs twenty five basis points at its next rate decision meeting on January 18th. Thus, a better than expected inflation report will not only fuel loonie price action, but will also increase interest rate expectations. However, a dismal release will have the inverse reaction and will increase concerns in the region following the less than expected third quarter economic activity report, which showed that figures pushed 1.0 percent higher to mark the slowest pace of growth since the third quarter of 2009.

Market participants should also monitor the global developments due to the fact that a decline in global trade could weigh on the region’s recovery. Debt contagion fears in the Euro-Zone are gaining momentum and with credit rating agencies like Moody’s coming into the spotlight and downgrading Ireland, further losses in the loonie should not be ruled out. It is also worth noting that North Korea warned that it would attack South Korea is the Seoul proceeds with plans to test-fire artillery from the island Pyongyang. The result of another conflict in Korea will likely weigh on the commodity currencies and lead traders to safety-linked currencies.

Taking a look at price action, the USDCAD has reversed course at parity, and now looks poised to test the upper bounds of the descending channel dating back to September. So long as the channel is intact, downside risks remain. It is also worth noting that our speculative sentiment index stands at 2.46, and signals for downside risks.

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