Fundamental Forecast for Canadian Dollar: Bearish
The Canadian Dollar remains firmly anchored to overall risk sentiment trends, with prices closely tracking the S&P 500 benchmark stock index. With that in mind, the tone for the days ahead will be set over the weekend as Republican and Democratic party lawmakers convene anew at the White House to hammer out a deal that will raise the US legal debt limit and formulate a plan to lower the budget deficit over the coming years.
Talks centered on the so-called “Gang of Six” bipartisan initiative that would trim $3 trillion from the shortfall over the next decade broke down on Friday as House of Representatives Speaker John Boehner walked away from negotiations, saying he was unwilling to sign off on tax increases envisioned in the deal. With just over a week left before the August 2nd deadline to raise the debt ceiling, lawmakers will make another go of it over the weekend, with markets playing catch-up to whatever headlines emerge from Washington as the opening bell rings in Asia on Monday morning.
Indeed, with sovereign fears on the decline in the Euro Zone after an unexpectedly bold EU leaders’ summit outcome last week, the US debt fiasco has taken center stage as the core macro-level issue guiding sentiment over the near term. Continued brinksmanship will feed uncertainty, weighing on shares and the risk-linked Canadian Dollar lower, whereas the emergence of a viable solution is naturally expected to have the opposite effect.
The landscape is complicated by a busy US economic data calendar, with the Fed Beige Book survey of regional economic conditions and the second-quarter GDP report taking top billing. Evidence of a broad-based slowdown in global growth is piling high as all three leading output engines – the US, the EU and China – show acute signs of weakness. With US output growth expected to slow to 1.8 percent in three months through March that narrative will be reinforced further, weighing on sentiment and the Loonie by extension.
On the domestic data front, Canadian GDP growth is expected to remain unchanged at yearly clip of 2.8 percent in May. A disappointing outcome could prove particularly market-moving after last week’s unexpectedly soft CPI reading, dimming the near-term prospect of a Bank of Canada interest rate hike.
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