Fundamental Forecast for Canadian Dollar: Bearish

The Canadian dollar was virtually unchanged against the greenback for the week as risk on/off sentiment kept the pair range bound. Despite a surprise drop in the unemployment rate to 7.4% from 7.6%, the loonie is expected to see further downside as concerns over growth in the US and sovereign debt fears in Europe continue to weigh on risk appetite.

With the FOMC rated decision on tap next week, loonie traders will be looking to the Fed for clues as to the central banks rate outlook as the Bank of Canada is unlikely to move on rates ahead of its largest trading partner. As ongoing softness in the real economy becomes more evident the Fed is widely expected to keep interest rates at record lows for the remainder of the year and Chairman Bernanke will likely keep the ‘extended period’ language as it pertains to rates in an effort to ensure the recovery remains on proper footing. Interest rate expectations from the BoC continue to diminish with Credit Suisse overnight swaps now factoring in only 53 basis points of hikes for the next twelve months. Expectations have fallen considerably from May peak of 95 basis points as weaker growth prospects and a sting of poor economic data from the US continued to weigh on interest rate expectations.

Investors will be closely eyeing retail sales figures out of Canada on Tuesday with consensus estimates calling for a print of 0.5% m/m, up from a previous flat read in May. A weaker than expected print would likely see further losses for the loonie as traders continue to pare back risk trades. Accordingly, dollar strength is expected gather pace in the days to come, lifting the USD/CAD pair higher.

The loonie remains vulnerable to further losses moving forward after the USD/CAD encountered strong support below the 0.97-handle. A close above long standing resistance at the 0.9815 level sees topside targets at the 0.99-handle, followed by 0.9950 and parity. Interim support holds at 0.9750 with subsequent floors eyed at 0.9680 and the 0.96-handle.

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