Canadian Dollar Could Slump on Bank of Canada Rate Cut, Easing CPI

Canadian Dollar Could Slump on Bank of Canada Rate Cut, Easing CPI

Fundamental Outlook for Canadian Dollar: Bearish

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The outlook for the Canadian dollar looks bleak this week as nearly every fundamental factor on tap provides bearish potential for the currency. First, the Bank of Canada is widely expected to cut rates by at least 25bps, though a Bloomberg News survey shows that 10 of the 17 economists polled are betting they will slash rates by 50bps to 2.00 percent. The confusion comes from the fact that they just cut rates on October 8 in a coordinated effort with the Federal Reserve, European Central Bank, Bank of England, and Swiss National Bank, while Credit Suisse overnight index swaps show the markets pricing in a whopping 100bps worth of reductions during the next 12 months. However, looking at the BOC’s October 8 press release and recent economic data, it is clear that the central bank will indeed move to cut rates further in coming months, but they may not be quite so aggressive as to cut rates by 50bps so soon. Instead, we could see something along the lines of a 25bp cut, along with a policy statement that suggests they will make monetary policy more accommodative going forward. Regardless, the news should have a huge impact on the Canadian dollar, but where the currency goes may have more to do with the bias reflected in the policy statement.

Meanwhile, consumer spending in Canada is expected to have slipped 0.2 percent in August, but excluding autos, retail sales are forecasted to have risen 0.2 percent. However, there is potential for a surprisingly strong reading given the solid employment numbers we’ve seen lately. In fact, the Canadian economy has added on workers for the past two months, and a record 106.9K in September alone. Indeed, expansion has proven to be rather resilient in the face of the US economic slowdown, as domestic demand has yet to truly falter and as a result, the data could be bullish for the Canadian dollar. On the other hand, disappointing figures could trigger a sell-off in the currency. Traders should watch the October 20 release of Canadian wholesale sales as a leading indicator for headline retail sales.

Finally, on Friday, Canadian inflation figures are expected to reflect cooling price pressures as headline CPI is forecast to slip to 3.3 percent from 3.5 percent while the BOC’s core measure may go unchanged at 1.7 percent. The impact of this number on the Canadian dollar will have a lot to do with the bias reflected by the BOC when they announce rates on Tuesday, as indications of a dovish stance along with weak CPI results could send the Canadian dollar plummeting. On the other hand, if the BOC signals a neutral bias, CPI readings in line with expectations shouldn’t be very market-moving.

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