FOREX TRADE

Fundamental Forecast for Canadian Dollar: Bearish

- Canadian GDP Contracts in April, Factory Prices Tumble Lower in May
- USD/CAD Sentiment Mixed

The Canadian dollar weakened against the greenback following the drop in risk appetite, and the loonie may continue to face increased selling pressures over the following week as the economic calendar foreshadows a weakening outlook for the world’s eighth largest economy. As a result, fears of a protracted recession could lead the Bank of Canada to take additional steps this month in an effort to stem the downside risks for growth and inflation, and speculation for further easing could weigh on the exchange rate over the near-term.

At the same time, the BoC saw a risk for a prolonged recession, stating that the appreciation in the USD/CAD could ‘fully offset’ the recent improvements in the real economy, and the board is likely to hold a dovish policy stance over the medium-term as they pledge to hold the benchmark interest rate at the record-low into the following year. However, as researchers at the central bank see high uncertainties tied to ‘quantitative easing,’ the board may continue to hold a neutral policy stance going forward, and long-term expectations for higher interest rates could drive the Canadian dollar higher throughout the second half of the year.

The economic docket for the week ahead is expected to show a rise in business spending, with economists forecasting the Ivey purchasing managers index to increase to 50.3 from 48.4 in May, while housing starts are projected to increase for the third consecutive month in June. A rise in business activity paired with a rebound in home construction could raise the outlook for the region as the government takes unprecedented steps to stimulate the ailing economy, and speculation for a global recovery could drive the Canadian dollar higher as market sentiment improved. Nevertheless, the labor market is widely expected to weaken further in June, with market participants expecting the annual rate of unemployment to reach an 11-year high of 8.7%, while the trade deficit is projected to widen in May on the back of falling exports. As firms face fading demands from home and abroad, businesses may continue to scale back on production and employment, and the data is likely to encourage a weakening outlook for the economy as central bank forecasts economic activity to contract at an annual pace of 3.0% this year, which would be the biggest decline since 1933. - DS