Canadian Dollar Looks to Inflation Report For Next Moves

Canadian Dollar Looks to Inflation Report For Next Moves

Fundamental Forecast for Canadian Dollar: Neutral

- Canadian Dollar To Consolidate Versus U.S. Dollar

- Canadian Housing Starts at Slowest Pace in 2010

The Canadian dollar pushed lower against its U.S. namesake last week, falling some 0.97 percent through Friday’s close. As the USDCAD has been relatively unchanged this past week, and clearly volatile since May, traders should caution entering into USDCAD position this week until furher development arise; however, an opportunity in the EURCAD may be in the horizon as the pair is at the crossroads of the 100-day moving average.

The loonie lost ground against the U.S. following dovish comments from the FOMC and disappointing data from the Canadian economy. The Fed held rates at 0.25 percent as widely expected and went onto add that borrowing costs will remain low for an “extended period.” At the same time, the committee said it will reinvest its proceeds from mortgage bank securities into treasuries, while stating that “the pace of the recovery in output and employment has slowed in recent months.” These comments paired with the statements from BoE officials at their quarterly inflation report on Wednesday rattled the markets, and lead investors to seek safety (the U.S. dollar and Japanese Yen). Canadian dollar weakness is not solely due to dovish Fed and BoE comments. Looking at the economic docket from the loonie this past week, the economy’s trade deficit widened to a 10-month high as demand from abroad remains weighed by a global slowdown. Meanwhile, housing starts fell to a seventh month low. With the U.S. being Canada’s key trading partner, growth in the world’s eighth largest economy will likely slow in the third and fourth quarter as the U.S. battles tight credit conditions, high unemployment, and a uncertain economic outlook.

For this upcoming week, CAD traders will shift their focus to the inflation report for the month of July and manufacturing sales for June. Disappointing figures will surely weigh on price action and may lead the single currency to extend its recent decline. With regards to price action, there are too many mix signals to make a clear forecast for the USCAD. However, the EURCAD is displaying some signs for a potential short trade set up. On Thursday, the pair broke below the 20-day moving average which has formed as support since late June. In turn, price action now sits at the crossroads of the 1.320. A clear break below this level may expose downside risks back towards 1.300. - MW