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Canadian Dollar Poised For Pullback Amid Slowing Growth, Inflation

Canadian Dollar Poised For Pullback Amid Slowing Growth, Inflation

David Song, Strategist
Canadian_Dollar_Poised_For_Pullback_Amid_Slowing_Growth_Inflation_body_Picture_5.png, Canadian Dollar Poised For Pullback Amid Slowing Growth, Inflation

Fundamental Forecast for Gold: Bearish

The Canadian dollar continued to appreciate against its U.S. counterpart as currency traders increased their appetite for risk, but the loonie may struggle to hold its ground next week as the economic docket is expected to dampen speculation for a Bank of Canada rate hike. Indeed, gross domestic product is projected to increase 0.2% in May after expanding 0.3% the month prior, while input costs are expected to weaken for the second consecutive month in June.

As growth and inflation tapers off, market participants see the BoC maintaining its current policy over the next 12-months according to Credit Suisse overnight index swaps, and the central bank may have little choice but to carry its wait-and-see approach into the following year as the slowdown in the global economy drags on the recovery. However, as the record rise in household indebtedness continues to present the biggest domestic risk for the region, we are likely to see BoC Governor Mark Carney continue to talk up speculation for higher borrowing costs, and the central bank head may have little choice but to raise the benchmark interest rate from 1.00% in an effort to ward off a housing bubble. At the same time, the FOMC interest rate decision on tap for August 1 is likely to heavily influence the USDCAD as market participants weigh the outlook for monetary policy, and a less-dovish Fed may spark a short-term reversal in the exchange rate as it dampens the scope for another large-scale asset purchase program.

As the USDCAD bounces off of the lower bounds of the downward trending channel carried over from the previous month, the technical outlook certainly foreshadows a short-term correction in the exchange rate, and we may see the pair threaten the bearish trend as the dollar-loonie finds interim support around former resistance (1.0020-30). As the USDCAD appears to be carving out a higher low ahead of August, the upside break in the relatives strength index reinforces our call for a move back to the upside, and we may a bullish breakout over the near-term as the scope for a BoC rate hike deteriorates. - DS

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.