Canadian Dollar Pins Hopes on Oil, Growth

The Canadian Dollar outlook remains bullish as world crude made a huge rally which could induce the loonie to make a big breakout.  The positive sentiment of the market was not affected by the failed Canadian Gross Domestic Product (GDP) target, although this heightened growth risks.

Oil Surge Fuel CAD Bullishness

The surge of oil prices to $118 on Friday’s futures trading session could further fuel the bullishness of the Canadian dollar on the financial markets.  World crude made a big rally at the floor due to the threat posed by Hurricane Gustav on the oil platforms on the Gulf of Mexico.  

The impending rise of world crude prices could give the Canadian dollar its renewed strength thus getting the positive sentiment of the market.  Earlier in August, the Canadian dollar peaked to 1.0726.  It rebounded however and maintained a tight trading range between 1.0605 and 1.0410. If the price of oil will hit $120 at the futures trading floor, the loonie could hit 1.0400.

BoC Benchmark Rates Decision, Highly Awaited by the Market

The US Dollar / Canadian Dollar exchange remains very volatile but this could worsen depending on the impending policy decision of the Bank of Canada (BoC) on interest rates benchmark.  

Several economists were surveyed by Bloomberg News and the consensus is that the Bank of Canada is expected to maintain the current benchmark on interest rates at 3 percent.  

A counter expectation was seen however among market players with the increased interest rate swaps.  This shows that market participants are highly anticipating a benchmark rates increase implemented by the BoC over the next twelve months.  

Inflation: Slowing Down the Economy

Despite the positive projections of easing, the domestic economy of Canada continues to suffer from high consumer inflation price.  Data showed that inflation registered a five –year high of 3.4 percent in July.  The figure is far above the expected inflation target of the central bank which was pegged at 2 percent.

On the other hand, the Canadian GDP data for second quarter showed a very thin upward movement posting a measly 0.3 percent.  Spiraling inflation and the grinding economic growth could spur the central bank to change its position from being neutral to a more active policy of going forward.

On a final note, the USD / CAD exchange rate will remain to be volatile as Friday’s top event risk is expected to generate payrolls growth of 5.0K following a July contraction of 55.2K.   

The Canadian dollar can gain from the rise of employment rate as this would induce another wave of bullish outlook.   The Ivey PMI also can spur some significant movements in the market as players expect the index to go down to 62.0.