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Canadian Dollar Outlook Remains Bearish Ahead of GDP Report

Canadian Dollar Outlook Remains Bearish Ahead of GDP Report

Renee Mu, Currency Analyst
Canadian_Dollar_Outlook_Remains_Bearish_Ahead_of_GDP_Report_body_Picture_1.png, Canadian Dollar Outlook Remains Bearish Ahead of GDP Report

Canadian Dollar Outlook Remains Bearish Ahead of GDP Report

Fundamental Forecast for Canadian Dollar: Bearish

The Canadian dollars weakened against its U.S. counterpart on the week, with USD/CAD hitting 7-month highs, as retail sales in December unexpectedly dropped by the most since 2010. In addition, Canada’s Consumer Price Index inflation for January came in lower-than-expected on both monthly and yearly basis. Going forward, the Loonie may continue to weaken over concerns on the weakness of Canadian real economy as well as the record low domestic interest rate.

As more bearish signs have changed outlook for Canada’s economic recovery and inflation remains low, the Bank of Canada is likely to shift to a neutral bias and look to keep interest rates at record-lows. Canadian employment fell in January for the first time in six months and manufacturing sales dropped as well. Economists in a survey polled by Bloomberg News have called for a 0.2 percent contraction in Canadian December Gross Domestic Product for the report due Friday. If the readings come in weaker than expected, the Loonie will likely be pushed to new lows.

In order to lower borrowing costs and further boost the economy, we may see policy makers hold benchmark interest rates through 2013. Unchanged rates would almost certainly hurt the Loonie as previous expectations called for higher yields.

With a slow growth in domestic side, Canada’s exports may weigh more on the recovery of economy. The amount in Canadian exports have not returned to pre-recession levels and thus a weaker Loonie will benefit exporters as their products will be more competitive in the global market. In order to maintain foreign demands for Canadian products, the Loonie may preserve its recent downward trend for a longer period.

Another driver to the Canadian dollar next week will be the testimony by Fed Chairman Bernanke on monetary policy report made to the Congress, as US is Canada’s largest trade partner. Although much of the Fed’s policy has been covered in the FOMC Minutes released this week, questions raised to Bernanke will be interesting. This will help investors gauge the likelihood of ending or increasing monetary stimulus in the near term. If the US economy recovers at a faster pace, Canada could also benefit from the strengthening of its biggest importer. -RM

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