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Canadian Dollar Outlook Weighed By BoC Rate Decision

Canadian Dollar Outlook Weighed By BoC Rate Decision

David Song, Strategist
Canadian_Dollar_Outlook_Weighed_By_BoC_Rate_Decision_body_Picture_5.png, Canadian Dollar Outlook Weighed By BoC Rate DecisionCanadian_Dollar_Outlook_Weighed_By_BoC_Rate_Decision_body_Picture_6.png, Canadian Dollar Outlook Weighed By BoC Rate Decision

Fundamental Forecast for Canadian Dollar: Bearish

The Canadian dollar ended the week higher against its U.S. counterpart, but the loonie may struggle to hold its ground over the coming days should the Bank of Canada talk up speculation for additional monetary support. According to Credit Suisse overnight index swaps, market participates see an 8% chance for a 25bp rate cut, but the statement accompanying the rate decision is likely to produce a pronounced reaction in the currency market as investors weigh the prospects for future policy.

As the slowdown in the world economy dampens the outlook for Canada, Governor Mark Carney may drop his neutral tone for monetary policy, and the central bank head may continue to highlight the risks surrounding the fundamental landscape as policy makers see the economy operating below full-capacity ‘well into 2013.’ As the sovereign debt crisis threatens the global financial system, Mr. Carney may sound a little more dovish this time around, and we may see the bank scale back its assessment for the region as the economic downturn in Europe curbs the prospects for future growth. At the same time, Mr. Carney may continue to speak against the ‘debt-fueled’ rise in private sector consumption as it diminishes the ‘margin to maneuver,’ and the BoC may show an increased willingness to revert back to its easing cycle in an effort to shield the economy. In turn, the recent strength in the Canadian dollar may unravel over the following week, and the USD/CAD looks poised to push higher over the near-term as it maintains the upward trend carried over from the previous year.

As the series of higher lows reinforces a bullish outlook for the USD/CAD, the pair should continue to retrace the selloff from the November high (1.0523), but the pair appears to be stuck within an ascending triangle as price action remains capped by the 61.8% Fibonacci retracement from the 2007 low to the 2009 high around 1.0580-1.0600. As the exchange rate approaches the apex, a bullish breakout appears to be on the horizon, but we may see the USD/CAD trend sideways over the near-term should the BoC endorse a wait-and-see approach for 2012. - DS

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