Canadian Dollar To Weaken Further As Housing Threatens Recovery

By David Song, Currency Analyst

Fundamental Forecast for Canadian Dollar: Neutral

The Canadian dollar struggled to hold its ground coming into May and the loonie may face additional headwinds next week should the economic docket highlight a weakening outlook for the region. Indeed, we’re expecting to see a slowdown in the housing market and a slew of dismal developments may trigger a sharp selloff in the exchange rate as it raises the risks surrounding the region.

Bank of Canada Governor Mark Carney continued to strike a cautious tone for the region amid the record expansion in household debt, and it seems as though the central bank head is pushing for a rate hike in order to discourage private sector lending. At the same time, Finance Minister Jim Flaherty warned that the recovery will be ‘lumpy’ as economic activity unexpectedly weakened in February, and argued that borrowing standard may need to be tightened further as the low-interest environment continues to fuel household indebtedness. According to Credit Suisse overnight index swaps, market participants see the benchmark interest rate rising by more than 25bp over the next 12-months, but the BoC may refrain from embarking on a series of rate hikes amid the ongoing slack within the real economy. As Mr. Carney’s attempt to talk down borrowing fails to materialize, it seems as though the BoC has little choice but to lift the benchmark interest rate from 1.00%, but we should see the central bank revert back to a wait-and-see approach as the fundamental outlook for the region remains clouded with high uncertainty.

As the USDCAD continues to come off of the year low (0.9799), a slew of dismal developments should spark another run at parity, but we may see the exchange rate track sideways through May as market participants look towards the BoC interest rate decision on June 5. However, as the economy is expected to add another 10.0K jobs in April, another blowout labor report could fuel speculation for a rate hike, and we will keep a close eye on the 0.9800 – 1.0050 range as the pair looks poised for a major breakout going into the second-half of the year. - DS

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Original Article: http://www.dailyfx.com/forex/fundamental/forecast/weekly/cad/2012/05/04/Canadian_Dollar_to_Weaken_Further_As_Housing_Threatens_Recovery.html