Fundamental Forecast for Canadian Dollar:Neutral

The Canadian dollar continued to lose ground against its U.S. counterpart, with the USD/CAD rallying to a fresh monthly high of 1.0301, but the pair looks poised for a short-term correction as the loonie finds near-term support. Indeed, the loonie regained its footing as the headline reading for inflation came in above forecast, and the stickiness in price growth may lead the Bank of Canada to soften its dovish tone for monetary policy as the economic docket for the following week is expected to instill an improved outlook for the region.

The USD/CAD appears to have found psychological resistance around 1.0300 as it quickly fell back from the fresh monthly high, and the loonie may continue to recoup the losses from earlier this month as we’re expecting to a slew of positive developments next week. Private sector consumption is anticipated to increase in September, with market participants forecasting another 0.5% rise in retail sales, while wholesale spending is projected to increase 0.6% during the same period after advancing 0.2% in August. The ongoing improvement in private sector activity is likely to spark a bullish reaction in the Canadian dollar, and the development may encourage the central bank to talk down speculation for lower borrowing costs as it raises the outlook for future growth. However, as BoC Governor Mark Carney sees commercial banks scaling back on lending, we may see tightening credit conditions drag on the recovery, and the central bank may retain a dovish tone for monetary policy as it expects the economy to operate below full-capacity until the end of 2013. In turn, we may see Mr. Carney carry the wait-and-see approach into the following year, and the central bank head may preserve a neutral tone throughout the first-half of the following year as he aims to balance the risks for the region.

Should the USD/CAD hold resistance around 1.0300, the small pullback in the exchange rate may turn into a larger correction, but we should see the former resistance - the 78.6% Fibonacci retracement from the 2007 low to the 2009 high around 0.9880-0.9900 - hold up as support. As a result, the dollar-loonie looks poised to face sideways price action over the near-term, but the shortened trading week due to the Thanksgiving holiday may spur choppy price action across the major currencies as U.S. traders are scheduled to go offline in the second-half of the week. - DS