Weekly Outlook: Further Evidence Keeps Canadian Interest Rates On Hold

Ending the week off pretty much where it began, the USDCAD currency pair remains well atop the 1.1100 handle that was broken to the upside in the previous week as dollar bullishness was at least felt against the counter Loonie.

Nonetheless, the price action continues to remain in a broader longer term range bound environment, contained by 1.1400 handle resistance and lower 1.1000 support figure.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

With last weeks data relatively positive, given the falling prices of crude oil contracts, the loonie moved incrementally higher against counter currencies as speculation increased of better growth in the worlds ninth largest economy.  This weeks data, however, is likely to lend a slightly more mixed undertone on a handful of reports.  Industrial product price figures are likely to counter the sentiment seen from last weeks consumer price report, expected to decline in line with raw material prices for the month of August.  Attributed to the unchanged consensus figure are lower commodity prices as traders have exited en masse from contracts including crude oil contracts and base metals like copper, silver and gold.  Lower product prices supports the notion that inflationary pressures, at least at the producer levels, are thin and will likely contribute heavily to the Bank of Canadas decision to keep rates at the current running 4.25 percent.  Raw material prices are expected to pullback from the 5.2 percent surge in the month of July to a 0.5 percent monthly rate.  Although important, price reports will likely be overshadowed by the gross domestic product report for July.  A monthly comparison, the figure is expected to rise by 0.2 percent, higher compared to the surprising unchanged figure witnessed in the month of June.  Attributed to the positive rebound looks to be sustained economic activity in the economy, with advancing improvements in the overall production.  Last month, the market witnessed an unchanged economy on weaker growth in mining, manufacturing and oil and gas extraction.  Subsequently, the weaker results offset gains in the service industries, pitting overall growth at a 2 percent rate for the second quarter.  The figure is comparably lower than the 3.6 percent growth printed in the first quarter.  However, with the positive pullback in the July month, overall growth is expected to tick back up and hover just below the central bank projection of 3 percent growth.  The notion should add healthy bidding tones to the economy, and underlying currency, in the absence of positive interest rates.

Comparatively, a directional bias was clearly seen in the overall market as the full schedule for the Loonie provided clearly optimistic sentiment.  Adding to the viability of Canadian based securities, foreign demand surged higher in the month to the tune of C$3.140 billion versus a C$1.75 billion consensus figure.  Although positive as the figure came out above the consensus figure, the overall trend remains lower wit the reporting heading lower for the past three months.  Nonetheless, the return to a significantly higher figure gave CAD bulls some room to breathe.  The Canadian consumer price index gave some additional strength on the week, rising in line with the consensus figure at a 2.1 percent annualized pace.  Bolstered sustained inflationary notions, the core figure additionally jumped higher by 0.2 percent to keep indications of growth alive.  Subsequently, further growth is likely to see this figure higher, supporting speculation of higher interest rates sometime in the future.  Finally rounding out the week and offering a strengthening suggestion of consumer support was the retail sales survey.  In the month of July, sales rose at a 1.5 percent annualized pace, reversing the 0.2 percent decline seen in the previous period.  Here, sales advanced to $29.4 billion according to Statistics Canada, almost doubling the consensus figure as car dealer receipts increased on the month.  Notably lifting the figure was the fact that the month of July stood as the first month where consumers benefited from cuts in federal sales taxes.  Lowering the national tax from 7 percent to 6 percent likely increased consumption of higher ticket items as policy makers continue to support a growing economy.  Nonetheless, the figure may in fact be overstating the demand as both auto purchases and tax cut policies are considered to be volatile components of retail reports.  Subsequently, leading indicators were in line with the 0.2 percent rise expected as wholesales sales rose at a 2.1 percent pace.

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