Canadian Dollar Strength Threatened By BoC Rate Decision

By Michael Boutros, Currency Analyst

Fundamental Forecast forCanadian Dollar: Neutral

The Canadian dollar was virtually unchanged at the close of trade this week with the loonie posting a marginal advance of 0.10%. The week has been marked by massive swings in risk sentiment as conflicting and often erroneous reports out of Europe saw hopes for a euro “resolution” rise and fall. The loonie has continued to hold an increasingly tight correlation with the S&P 500 as improving risk appetite continues to prop the two in tandem.

CPI data out of Canada earlier today showed the pace of inflation climbing by 3.2% y/y besting calls for a read of 3.1% y/y, with the BoC Core data printing at 2.2% y/y, topping calls for a read of 2.0% y/y. Coupled with last week’s surprisingly high unemployment print, the Bank of Canada may see scope to soften its dovish stance on policy as the outlook for growth prospects continue to improve. Although interest rate expectations saw little change today, expectations could get a boost next week with retail sales data expected to show further improvement in consumer spending with consensus estimates calling for a print of 0.3% m/m, up from a previous read of -0.6% y/y.

Highlighting next week’s economic calendar will be the Bank of Canada interest rate decision on Tuesday. Although the central bank is widely expected to leave rates unchanged at 1.00%, traders will be closely eying the accompanying statement for insight into future monetary policy. Although domestic growth concerns have started to ease, increased speculation of further debt contagion from Europe may see the BoC may continue to sound a cautious outlook. With expectations that European officials will announce an ‘ambitious’ rescue plan to shore up distressed banks and stem the threat of contagion next week, risk broader market sentiment remains to the downside. Should leaders fail to satisfy markets that the situation is under control, it’s likely that risk assets will see a large reversal with such a scenario likely to weigh heavily on the loonie. Accordingly the Bank of Canada may continue to sight concerns about global growth and fragility in financial markets as the European debt threat looms over central banks around the world.

The USD/CAD pair brokeout of a weeklong wedge formation on Friday before finding solacejust above the 100% Fibonacci extension taken from the October18 th and 20 th crests at 1.0070.Interim support holds here with a break below eyeing subsequentfloors at 1.0050, 10025, and parity. Interim resistance holds atthe 76.4% extension at 1.0110 backed by the 61.8% extension at1.0135 and 1.0180. A breach above this week’s highs at 1.0260risks significant losses for the greenback with topside targetseyed at 1.0325. -MB
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/forecast/weekly/cad/2011/10/21/Canadian_Dollar_Tied_to_SP_500.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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