Weekly Outlook: Loonie in For a Wild Ride on BoC Rate Decision

The Canadian dollar remained almost exactly unchanged on the week despite oil prices reaching all-time highs. Relatively bullish CAD news and a broad USD sell-off likewise had little effect on the USDCAD pair, as traders were likely hesitant to open large positions ahead of the BoC interest rate announcement on July 11. North American markets now hold their breath in anticipation of the upcoming Canadian rate decision and trade balance reports.

After a remarkably lethargic week, the USDCAD will likely see a jump in price volatility on the ever-important BoC monetary policy decision. Some expect that the central bank will raise the interest rate target by 25 basis points, but synthetic forward rates highlight the lack of a clear market consensus. The September contract reflects an approximately 50% likelihood of such a hike, which is a considerable drop from earlier predictions. Indeed, a recently mixed economic picture clouds inflation expectations and may cause BoC Governor David Dodge to pause in his rate increase schedule. Markets will pay close attention to both the rate decision and any general comments to follow.

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Later in the week, Statistics Canada will report on two important measures of national trade. Due on Wednesday, Mays International Merchandise Trade Balance looks to halt a steady downtrend in the countrys overall surplus. With the Canadian Dollar at its highest levels in nearly two decades, cheaper imports and a slump in exports continue to wear away at the net inflows figure. As such, median forecasts of a C$0.4 billion gain on Aprils C$4.1 billion reading would provide exporters with welcome relief.  Manufacturing Shipments are likewise expected to have improved on the month, with a predicted 0.8 percent increase following Aprils 1.5 percent decline. These gains would prove bullish for the currency, as rumors of potential foreign exchange market intervention threaten to halt any further appreciation in the Canadian dollar. Though it is yet unclear whether this will actually take place, these two trade numbers should provide us with a clearer outlook on the potential for further USDCAD declines.

The past week of trading underscored the reasons for traders unwillingness to push the Canadian currency out of its narrow range. Despite oil prices at new all-time highs, the USDCAD remained 10 points above the weeks open through Wednesdays trading. Thursday subsequently provided little relief with a bearish Ivey Purchasing Managers Index result erasing an early morning rally. Printing at 62.2, the survey reading came in below expectations of 65.0 and represented a 12.8 drop on the month. The lack of consistency across economic health measures continued through Friday, however, as Junes Unemployment Rate unexpectedly matched Mays 32-year low. Despite a net loss of 4.6K jobs on the month, the Canadian labor market continues at its strongest in over three decades. With such wildly different economic reports, it will be very interesting to hear BoC Governor David Dodges outlook on the overall Canadian economy. Needless to say, it should be an exciting week in Loonie trading.

Economic Releases for July 10 July 14