Forex: Canadian Dollar To Threaten Major Trend As Rate Expectations Falter, U.S. Dollar To Take Cues From Risk

The Canadian dollar pared the overnight advance as the recent batch of economic developments reinforced a weakened outlook for the region, and the loonie is likely to face additional headwinds over the near-term as interest rate expectations falter.

Talking Points

• Canadian Dollar: Inflation Holds Steady, Retail Sales Disappoints
• British Pound: Interest Rate Expectations Falter, 1.6000 In Sight
• Euro: Fails To Push Above 50-Day SMA, Range Bound Price Action Ahead
• U.S. Dollar: Risk Sentiment To Heavily Influence Price Action

The Canadian dollar pared the overnight advance as the recent batch of economic developments reinforced a weakened outlook for the region, and the loonie is likely to face additional headwinds over the near-term as interest rate expectations falter. As the headline reading for inflation holds steady at an annualized 3.3%, the Bank of Canada is likely to carry its wait-and-see approach into the second-half of the year, and Governor Mark Carney may continue to talk down speculation for higher borrowing costs given the ongoing weakness in the real economy. According to Credit Suisse overnight index swaps, investors are now pricing the benchmark interest rate in Canada to increase by 75bp over the next 12-months amid earlier projections for a 100bp rise, and the rebound in the USD/CAD should gather pace over the near-term as the pair appears to have carved out a bottom in May. As the dollar-loonie breaks above the 100-Day moving average (0.9763) for the first time since November, the exchange rate looks poised to work its way back towards the 78.6% Fibonacci retracement from the 2007 low to the 2009 high around 0.9900, and the pair may threaten the multi-year downward trend as the central bank retains a cautious outlook for the economy.

The near-term rally in the EUR/USD came to a halt on Friday, with the exchange rate retracing the overnight advance to 1.4344, and the pair may continue to selloff during the North American trade as the uncertainties surrounding the region bears down on market sentiment. Germany's central bank said the 1Q GDP report has ‘considerably' overstated the underlying momentum of the economy as it expects growth to ease ‘somewhat,' but argued that monetary policy remains ‘extremely expansionary' as price pressures in the euro-area intensify. As European policy makers toughen their stance against inflation, speculation for higher interest rates should help to keep the single-currency afloat, but the EUR/USD may face range-bound price action over the near-term as European Central Bank President Jean-Claude Trichet softens his hawkish outlook for monetary policy. As the euro-dollar struggles to get back above the 50-Day SMA at 1.4340, the pair may continue to retrace the advance from earlier this week, which could spur a test of former resistance around 1.4000.

The British Pound bounced back from a low of 1.6209 following a rise in risk appetite, but trader sentiment appears to be turning over as equity futures foreshadow a lower open for the U.S. market. As the GBP/USD continues to trade within the narrow range from earlier this week, the exchange rate may consolidate going into the end of the week, but the sterling remains at risk of facing additional headwinds over the near-term as the Bank of England continues to defy calls to toughen its stance against inflation. As market participants now see borrowing costs in the U.K. increasing by 25bp over the next 12-months, softening expectations for a rate hike is likely to weigh on the exchange rate, and the GBP/USD may work its way back towards 1.6000 should it break out of its recent range.

U.S. dollar price action was largely mixed overnight, with the USD/CHF tumbling to a low of 0.8757, but the greenback may regain its footing during the North American trade as currency traders appear to be scaling back their appetite for yields. As the economic docket remains pretty bare for the remainder of the day, risk sentiment could dictate price action going into the end of the week, and the Dow Jones-FXCM U.S. dollar index should continue to work its way towards 9800.00 as it maintains the upward trending channel from earlier this month.

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Related Articles: Weekly Currency Trading Forecast

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

FX Upcoming

Currency	GMT	EDT	Release	Expected	Prior
EUR	14:00	10:00	Euro-Zone Consumer Confidence (MAY A)	-12.0	-11.6

Currency	GMT	Release	Expected	Actual	Comments
NZD	22:45	Net Migration s.a. (APR)	--	-100.0	Weakens for second month.
NZD	3:00	Credit Card Spending s.a. (MoM) (APR)	--	1.6%	Rises for the second time this year.
NZD	3:00	Credit Card Spending (YoY) (APR)	--	6.0%
JPY	3:15	Bank of Japan Interest Rate Decision	0.10%	0.10%	Maintains current policy, economy to remain under pressure.
JPY	4:30	All Industry Activity Index (MoM) (MAR)	-6.1%	-6.3%	Biggest decline since series began in 1993.
EUR	6:00	German Producer Prices (MoM) (APR)	0.6%	1.0%	Increases for eight straight months.
EUR	6:00	German Producer Prices (YoY) (APR)	6.0%	6.4%
JPY	7:00	Convenience Store Sales (YoY) (APR)	--	1.6%	Rises for the sixth month.
EUR	8:00	Euro-Zone Current Account s.a. (euros) (MAR)	--	-4.7B	Narrows for the second time this year.
EUR	8:00	Euro-Zone Current Account n.s.a. (euros) (MAR)	--	-3.8B
EUR	8:00	Italian Industrial Orders s.a. (MoM) (MAR)	0.5%	8.1%	Biggest rise since August 2006.
EUR	8:00	Italian Industrial Orders n.s.a. (YoY) (MAR)	15.7%	21.2%
EUR	8:00	Italian Industrial Sales s.a. (MoM) (MAR)	--	2.0%	Increases for the third month.
EUR	8:00	Italian Industrial Sales n.s.a. (YoY) (MAR)	--	12.2%
CAD	11:00	Consumer Price Index (MoM) (APR)	0.5%	0.3%	As the headline reading for inflation holds pat, the BoC is likely to retain its wait-and-see approach.
CAD	11:00	Consumer Price Index (YoY) (APR)	3.4%	3.3%
CAD	11:00	Bank Canada CPI Core (MoM) (APR)	0.2%	0.2%
CAD	11:00	Bank Canada CPI Core (YoY) (APR)	1.6%	1.6%
CAD	11:00	Consumer Price Index (APR)	--	119.8
CAD	12:30	Retail Sales (MoM) (MAR)	0.9%	0.0%	Retail spending holds flat throughout the first three-months of 2011.
CAD	12:30	Retail Sales Less Autos (MoM) (MAR)	0.7%	-0.1%