Fundamental Forecast for Canadian Dollar: Neutral

The Canadian dollar was mostly lower on the week, falling 0.25 percent against its American counterpart, while falling against every other major currency, save the Euro, which it was up 1.59 percent as concerns reemerged from Europe that, despite the bailout for Greece, the major rating agencies – Fitch, Moody’s and S&P – could declare a “selective default” regardless.

In terms of Canadian data from the first full week of July, industrial product prices, as well as the raw material price index, fell in May from April, showing that recent Loonie strength, coupled with a general depreciation in commodity prices, led to lower inflationary pressures. The housing sector continued to improve, with prices increasing by 1.9 percent in May, while the Canadian economy added 28.4K jobs were added in June, with the unemployment rate holding at 7.4 percent. Data from Canada did all it could, however, to boost the Loonie, though the broader market sentiment of risk-aversion clearly guided the currency lower.

The Loonie will continue to move at the will of broader market sentiment, considering there are only a handful of significant data releases due during the second full week of July. The housing starts data due on Monday, a gauge of the number of residential units on which construction has started each month, is forecasted to show further gains for June, up to 185.0K from 183.6K; the housing data is the most significant print for the entire week. The next significant piece of data released that will guide the Loonie next week comes on Friday, when manufacturing sales figures from May will be released; however, given the two-month delay, and the expectation that manufacturing remained depressed due to supply chain disruptions resulting from the natural disasters and ensuing nuclear catastrophe in Japan, the event risk posed could be limited. Nonetheless, should the print beat the -0.2 percent forecast, the Loonie could see some strength on the day.

In all likelihood, the Loonie will continue to trade as a proxy for speculators betting on the health of the U.S. economy. As noted today, with the extremely disappointing nonfarm payrolls data from the U.S., despite a strong labor market reading for the Canadian economy, the USD/CAD pair gained, up 0.17 percent on the day, though price action was exceptionally choppy following the release at 12:30 GMT. That being said, market participants trading Loonie-based pairs will eye rhetoric deployed by Bank of Canada policymakers ahead of the July 19 Bank of Canada rate decision, even though there is a small 3.2 percent chance of a 25.0-basis point rate hike, according to the Credit Suisse Overnight Index Swaps.

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