Bes Stocks To Buy 2014, Best Stocks For 2014: Canadian Dollar Strength To Unravel On Easing Price Pressures

Friday, December 23, 2011

Canadian Dollar Strength To Unravel On Easing Price Pressures

By David Song, Currency Analyst

Fundamental Forecast forCanadian Dollar: Bearish

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The Canadian dollar firmed up going into the second full week of November, but a soften inflation report could spark a selloff in the loonie as it heightens the risk of seeing lower interest rates. Indeed, the rebound in market sentiment led the USD/CAD to pare the advance to 1.0265, and the exchange rate may extend the sharp reversal from the previous month should the rise in risk appetite gather pace.

However, consumer prices are expected to grow at an annual rate of 2.8% in October after expanding 3.2% in the previous month, and easing price pressures may encourage the Bank of Canada to carry its current policy into the following year as the region faces a slowing recovery. As the BoC plans to maintain the 2% target for price growth through 2016, the slowing recovery in Canada is likely to dampen the outlook for inflation, and we may see Governor Mark Carney endorse a wait-and-see approach throughout the first-half of 2012 as policy makers expect the economy to operate below full-capacity until the end of 2013. According to Credit Suisse overnight index swaps, market participants see the benchmark interest rate being held at 1.00% over the next 12-months, but the central bank may have little choice but to scale back borrowing costs as growth and inflation falter. In turn, we may see Mr. Carn! ey turn increasingly dovish over the coming months, and speculation for a rate cut may materialize in the following year as the central bank drops its pledge to gradually withdraw monetary stimulus.

As the USD/CAD continues to find resistance around 1.0160-70, the exchange rate may fall back towards the 78.6% Fibonacci retracement from the 2007 low to the 2009 high around 0.9880-0.9900 to test for near-term support, and the pair may hold this range over the remainder of the month as it breaks out of the major trend carried over from back in 2007. However, the USD/CAD could be in the process of carving out a higher low following the Golden Cross from back in September, and the dollar-loonie may make another run at the 61.8% Fib around 1.0570-1.0600 as it looks poised to make a higher high. - DS

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Original Article: http://www.dailyfx.com/forex/fundamental/forecast/weekly/cad/2011/11/11/Canadian_Dollar_Strength_To_Unravel_On_Easing_Price_Pressures.html

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