Weekly Outlook: Loonie May Find Strength on Upcoming Trade Data

The Canadian dollar lost ground against its <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />US namesake, as a relatively empty schedule gave way to Greenback strength. Despite starting the week lower, the USDCAD currency pair added 0.7 percent on the week as Fridays US labor report led the American currency higher against all others. With relatively sparse data for both Canadian and US economies on the horizon, the USDCAD is likely to remain range-bound in the absence of swings in commodity prices.

Starting off Canadian business week, government officials will report on the level of housing starts through the month of September. After falling below-trend in August, the figure may post a small rebound on continued employment strength. This will likely carry into a stronger New Housing Price Index the following day, with consensus estimates of a 1.0 percent monthly increase. Though this represents a slight 0.1 percentage point decline from the previous months pace, the indexs consistent trend underlines a housing market that should contribute to domestic economic growth through the end of the year.

Markets will subsequently shift their attention to Thursdays International Merchandise Trade news, which should reflect a small increase in the net trade balance. Analysts claim that a rebound in exports automobile-related goods and a simultaneous drop in corresponding imports will lead the headline figure higher. Regardless, continued strength in the domestic currency will likely mean that exports will make little-to-no contribution to economic expansion through the final quarter of the year. On a related note, a Friday news release will likely show that new motor vehicle sales continued to grow at a healthy pace in August, with forecasts of a 3.0 percent monthly change.

This past week saw relatively few new developments out of the Canadian economy, with economic news limited to Fridays employment report and Thursdays Ivey PMI data. The domestic producers release showed that purchasing managers boosted spending at a faster pace, as employment expenditures pushed the index from 55.7 to 59.9 in September. The bounce from the previous month's 55.7 reading proved that the drop in purchases was likely an aberration, and business conditions continue to improve at a healthy pace. Prices paid, on the other hand, actually fell to the slowest growth rate seen in over a year. This falls in line with broader market themes, with Canadian inflation showing no signs of price instability moving forward.

Low consumer price growth rules out the need for higher interest rates in the future, but Fridays employment report effectively tempered expectations of a rate cut through the end of the year. Unemployment fell to 6.4 percent as the economy added a solid 16.2K jobs in the month of September. Shifting interest rate speculation manifested itself most clearly in a sudden drop in bond prices which left yields at their highest in two weeks. If this bullish economic trend is to continue, we could see the Canadian dollar hold its ground against its US counterpart even as world commodity prices fall sharply from recent highs.