Canadian Dollar to Hold Range on Slower Consumption, BoC Testimony

Fundamental Forecast for Canadian Dollar: Neutral

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The Canadian dollar pared the decline from earlier this month as the Bank of Canada raised its fundamental assessment for the region, but the loonie may struggle to hold its ground next week as the economic docket is expected to reinforce a weakened outlook for growth. As market participants see a slower rate of private consumption in February, a slew of dismal developments could push the USDCAD back towards parity, and the pair may threaten the range-bound price action carried over from earlier this year should the data dampens the scope for a rate hike.

Indeed, the BoC talked up speculation for higher interest rates as policy makers now see the economy operation back at full-capacity in the first-half of 2013, and Credit Suisse overnight index swaps already reflect expectations for higher borrowing costs as market participants start to price a rate hikes for the next 12-months. However, we may see Governor Mark Carney endorse a one-time move in order to bring down the marked expansion in home-equity credit lines, and the central bank head may strongly oppose for a series of rate hikes as the record-rise in household indebtedness presents a major threat to the recovery. As Mr. Carney is scheduled to testify in front of the house of Commons Finance Committee and the Senate Banking Committee next week, the governor may strike a more balanced tone for monetary policy, and we may see the BoC preserve its wait-and-see approach for a prolonged period of time as the economic recovery continues to be driven by the ongoing rise in household borrowing.

As the USDCAD maintains the range-bound price action from earlier this year, we should see the pair move back towards the top of its range (0.9900-1.0050), but the FOMC interest rate decision may spark whipsaw-like price action in the exchange rate as market participants weigh the prospects for future policy. Should the Fed signal an increased willingness to move on rates, a shift in the policy outlook could produce a bullish breakout in the exchange rate as the BoC lags behind, but we may see the dollar-loonie continue to track sideways next week if the committee keeps the door open to expand monetary policy further. – DS