Canadian Dollar To Hold Range as Investors Weigh Outlook For Policy
Fundamental Forecast for Canadian Dollar: Bearish
- Retail Sales in Canada Unexpectedly Falters in July
- International Investors Increase Purchases of Canadian Securities
- USD/CAD SSI Points to Further Losses
The Canadian dollar weakened against the greenback, with the exchange rate pushing above the 50-Day moving average for the first time since July to reach a fresh monthly high of 1.0984, and the USD/CAD is likely to hold its broad range over the following week as investors weigh the outlook for future policy. The Bank of Canada announced it will extend the C$ 125B mortgage purchase program to “at least the end of January 2010” earlier this week in order to strengthen the banking sector, but said that two of the three emergency programs will be concluded at the end of October as the central bank sees “lower market-based funding costs and the lack of coverage in recent auctions for temporary liquidity facilities.” Moreover, Governor Mark Carney warned businesses will need further “restructuring” as he expects trade conditions to remain subdued over the next 18 months, and went onto say that it will take some time before “we are really going to see true growth, self-sustaining private sector growth” as the government stimulus begins to taper off.
Meanwhile, Prime Minister Stephen Harper said that the recovery remains “extremely fragile” and expects the downturn in the labor market to weigh on economic activity going forward, and the cautious outlook held by policy makers may continue to hamper long-term expectations for higher interest rates in Canada as the BoC pledges to hold borrowing costs at the record-low going into the following year. At the same time, Governor Carney continued to see a risk for a slower recovery following the marked appreciation in the exchange rate, and said that the rise may become an increased concern “if the currency appears to move away from fundamentals.” Nevertheless, the central bank head stated that it will be “absolutely essential” for the board to meet its medium-term target for inflation and remained willing to “provide additional stimulus” as the BoC maintains its dual mandate to ensure price stability and to promote full-employment, and went onto say that the board maintains the flexibility to adopt “unconventional policies” if conditions warrant. However, as the economic docket for the following is expected to show the monthly GDP reading to improve for the second consecutive month in July, while producer prices are expected to rise 0.4% in August, the data may spur increased demands for the Canadian dollar as policy makers anticipate economic activity to pick up throughout the second half of the year. As a result, the USD/CAD may retrace the three-day advance over the following week to push back below the 50-Day SMA at 1.0858 however, the rebound in risk aversion may lead the pair to test the 100-Day SMA (1.1116) for near-term resistance over the following week. - DS
