Canadian Dollar Weakness May Continue As GDP Expected To Contract

The Canadian Dollar continued its freefall during the week as weak retail sales and a BoC rate cut kept “loonie” bulls away. The USDCAD would break above the 1.2500 price level for the first time since 2005 as bearish fundamentals would fuel the current dim growth outlook for the Canadian economy.

Canadian Dollar Weakness May Continue As GDP Expected To Contract

Fundamental Outlook for Canadian Dollar: Bearish

- The BoC Cut Rates 25 bps as the Downside Risks To Growth Increased
- Canadian Retail Sales in August Fell 0.3%,  as Consumers Curbed Spending In The Wake Of The Credit Crisis
- Inflation Eased to 3.3% from 3.5% in August, As Falling Oil Prices Reduced Price Pressures

The Canadian Dollar continued its freefall during the week as weak retail sales and a BoC rate cut kept “loonie” bulls away. The USDCAD would break above the 1.2500 price level for the first time since 2005 as bearish fundamentals would fuel the current dim growth outlook for the Canadian economy. The expectations that the global economy is heading into a recession has lower the outlook for raw material demand and will continue to be a factor weighing on Canadian dollar sentiment.

Friday’s August GDP report will be a major event risk for the Canadian dollar especially if the risk winds die down and the dollar starts trading on fundamentals. The expected 0.3% decline in growth would be the first contraction since May. The Canadian economy started to rebound in the third quarter posting gains in June and July of 0.1% and 0.7% respectively, following contraction in the second quarter. However, the drag from falling commodity prices and slowing demand from the U.S. are expected to stunt growth well into 2009. Therefore, we may see the “loonie” look to test the 1.3000 price level and beyond as momentum is clearly stacked against it. Oil prices sharply falling have been a major contributor to the Canadian dollar’s weakness. Therefore, OPEC’s recent announcement that they plan to cut production by 1.5 million barrels a day starting in November could give “loonie” bears a reason to pause which may see the USDCAD trade higher next week. -JR
 
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