The Canadian dollar slowly accumulated 140 points of losses against the greenback this past week, as disappointing Canadian economic data, lower oil prices, and general US dollar strength left USD/CAD to wrap up the week at 1.1380. With the Bank of Canada likely to hold rates steady and lower inflation figures expected to post next week, CAD could continue to weaken as the clock ticks down to a time when the central bank will have to loosen monetary policy.
The main event of this coming week is the Bank of Canada monetary policy meeting, where Governor Dodge and his counterparts are anticipated to leave rates steady at 4.25 percent. The BoC's previous statement in September extended a neutral policy bias, but specified that risks to the outlook are two-sided as a reminder amid increasing market speculation of an eventual rate cut. Governor Dodge reinforced the steady policy outlook at the G7 meeting in Singapore during mid-September, observing the data we've seen since our July report wouldn't lead us at this stage to say our outlook would be significantly changed. Meanwhile, Canadian manufacturing shipment growth is expected to slow to 0.5 percent in August following the prior months jump of 0.8 percent. The factory sector remains under considerable pressure from a strong CAD and heightened international competition. Furthermore, an easing in petroleum and resource prices should weigh on shipment values. Similar to manufacturing shipments, wholesale sales is also likely to decelerate to 0.8 percent from 2.1 percent in July as a result of declining shipment values. The index of leading economic indicators is also set to be released next week, and is anticipated to expand 0.2 percent in September. While healthy growth in consumption should continue to support the index, a pull-back in the S&P/TSX along with the weakening housing sector should weigh on the index. Wrapping up the week will be the posting of consumer prices, which should decline in line with inflation reports around the world which showed that slipping energy prices during September took a bite out of price pressures.
Mixed data out of Canada last week failed to lend the national currency support. First out the gate was housing starts, which dropped sharply to 211.3K units from 222.0K units expected - their lowest reading since August of 2005. Cooling energy prices and an increase in rates are beginning to dampen Canadian appetite for new housing, with the data suggesting that the slowdown may be more severe than the market anticipated. Conversely, Canadian new house prices rose the most in over 17 years in August by 1.53 percent as the halt in the Bank of Canada's string of seven consecutive rate hikes was finally put to an end the month before. In trade data, the Canadian surplus with its southern neighbor widened to C$8.2 Billion. Leading the gain in surplus, nickel exports pushed the overall figure 0.3 percent higher to C$38.7 Billion, while imports shed 0.6 percent to C$34.5 billion on slower domestic demand for foreign goods. The report was not entirely bullish for the Canadian dollar, however, as lower demand for foreign goods may actually indicate that overall consumer spending may be trending lower. Given that personal expenditures are said to lead Canadian economic growth through the remainder of the year, we may see progressively worse GDP numbers if retail sales and import figures continue to the downside. Lastly, Canadian vehicle sales rose 2.8 percent in August, almost matching expectations of 3.0 percent following a 3.4 percent gain in July. Truck sales again led the way, rising 4.6 percent and accounting for about 80 percent of the total gain in vehicle sales during the month according to Stats Can.
