Fund outflows undermine Canadian dollar
USD/CAD Market Analysis from Investica
The Canadian economic data has suggested a moderation in growth, but with no evidence of a sharp downturn. Retail sales, for example, fell sharply in October, but this primarily reflected the impact of lower gasoline sales and underlying spending was firm. Employment levels have also remained relatively strong over the past few months. Headline inflation remains under control, but the core rate is above the 2.0% target level at 2.3% which will maintain some inflation concerns within the Bank of Canada. The most likely outcome is that interest rates will be left unchanged over the next few months. There will be concerns over the impact of a slowdown in the US economy and there is also the risk that investment funds will be withdrawn from the North American region which would undermine the Canadian currency, especially after recent tax changes. The trade account would be damaged by a sustained drop in commodity prices, but the current account situation will be robust and the fundamentals will still offer support. Overall, the US currency looks to offer little value at current levels even if gains extend to 1.16 in the short term.
Risk factors:
· A renewed tightening from the Bank of Canada would strengthen the Canadian dollar.
· A sustained downturn in US growth would increase concerns over Canadian trends.
· A further sharp retreat in oil prices could weaken the Canadian currency.
USD/CAD Forecasts:
Currency Spot (12-12): 1.1540
1-month forecast: 1.1580
3-month forecast: 1.1450
6-month forecast: 1.1250
The Canadian economic data has suggested a moderation in growth, but with no evidence of a sharp downturn. Retail sales, for example, fell sharply in October, but this primarily reflected the impact of lower gasoline sales and underlying spending was firm. Employment levels have also remained relatively strong over the past few months. Headline inflation remains under control, but the core rate is above the 2.0% target level at 2.3% which will maintain some inflation concerns within the Bank of Canada. The most likely outcome is that interest rates will be left unchanged over the next few months. There will be concerns over the impact of a slowdown in the US economy and there is also the risk that investment funds will be withdrawn from the North American region which would undermine the Canadian currency, especially after recent tax changes. The trade account would be damaged by a sustained drop in commodity prices, but the current account situation will be robust and the fundamentals will still offer support. Overall, the US currency looks to offer little value at current levels even if gains extend to 1.16 in the short term.
Risk factors:
· A renewed tightening from the Bank of Canada would strengthen the Canadian dollar.
· A sustained downturn in US growth would increase concerns over Canadian trends.
· A further sharp retreat in oil prices could weaken the Canadian currency.
USD/CAD Forecasts:
Currency Spot (12-12): 1.1540
1-month forecast: 1.1580
3-month forecast: 1.1450
6-month forecast: 1.1250
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