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Canadian Dollar May Come Under Pressure Ahead of BOC Decision

Fundamental Forecast for Canadian Dollar: Bearish

Canadian CPI fell for the fourth straight month in September, the worst series of declines since 1953
Crude oil could be setting the stage for a reversal, boding ill for the Canadian dollar

The Canadian dollar eased back on Friday after the release of the nation’s consumer price index (CPI) fell for the fourth straight month in September, the longest series since 1953. Indeed, the annual CPI rate fell to -0.9 percent, but on the other hand, the annual rate of the Bank of Canada’s core CPI eased back less than expected to 1.5 percent from 1.6 percent, highlighting the impact of volatile commodity prices on inflation reports in the nation. Furthermore, the data sets the stage for the Canadian dollar’s main source of event risk this coming week: the Bank of Canada’s rate decision.

The BOC is expected to leave rates unchanged at 0.25 percent once again. After the Bank left rates unchanged on September 10, they said that they would maintain a neutral stance through June 2010, and the rest of the statement was relatively optimistic as they said “GDP growth in the second half of 2009 could be stronger than…projected in July.” However, they also indicated that the Canadian dollar’s strength remained a threat to not only growth, but the return of inflation back to target. Overall, indications that the Bank still sees downside risks for inflation could weigh on the Canadian dollar, but as we’ve seen in the past, the currency is more responsive to changes in the economic outlook.

Other potential source of volatility for the Canadian dollar in the coming week comes from oil prices, which DailyFX Strategist John Kicklighter noted is showing signs of reversal, retail sales – which are forecasted to rise by a slight 0.1 percent – and the BOC’s Monetary Policy Report. However, it is that policy report that should draw the most attention as the BOC is likely to include updated outlooks on growth and inflation. That said, the key to price action will be revisions, as upward changes to GDP will lead the markets to aggressively price in rate increases in 2010. From a technical perspective, daily USDCAD charts show that RSI rose from oversold levels, which has typically yielded at least a few days worth of gains since the start of 2009.