USD/CAD Monthly Fundamental Forecast August 2012

By FX Empire Analyst - Barry Norman
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Outlook and Recommendation

The USD/CAD is trading at 1.0034 towards close to the low for the month, as shown on the below chart:

Highest: 1.0250

Lowest: 1.0004

Difference: 0.0246

Average: 1.0137

Change %: -1.36

CAD has traded in a relatively narrow 1,251 point spread over the last year. Technicals suggest this range is likely to remain in place; we agree, but suggest the bias is for strength. In isolation the drivers of CAD valuation have weakened: global growth has softened, oil prices are lower, European risks have escalated, major central banks cannot fix all the problems and the market is nervous. This is not typically a supportive environment for a commodity and growth sensitive currency like CAD; however, it is the relative valuation that matters and on this measure the CAD outlook is optimistic.

There are two sides to every currency pair, and the USD side is a weak one. The combination of the US fiscal cliff, a challenging political framework and loose, if not loosening, Fed policy creates an environment where the USD should weaken against CAD, outside of temporary spikes in risk aversion. On the Canadian side, the fundamental story is mixed. However, the Bank of Canada (BoC) stands out as the most hawkish of the DM central banks. Nonetheless, the market is instead pricing in a 25% probability of an interest rate cut over the next 9-months; this is likely too aggressive and should provide support for the CAD as it is priced out of the market.

FxEmpire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more recent analysis and information in our weekly reports and we provide daily updates and outlooks.

Central Bank Name: Bank of Canada

Date of next meeting or last meeting: Sep 05

Current Rate: 1.00 % (+ 0.25) At the time of this writing the BoC has met and held rates.

Statement highlights of last meeting: The Bank of Canada announced that it is maintaining its target for the overnight rate at 1%. The Bank Rate is correspondingly 1 1/4 % and the deposit rate is 3/4 %. Global growth prospects have weakened since the Bank’s April Monetary Policy Report (MPR). While the economic expansion in the United States continues at a gradual but somewhat slower pace, developments in Europe point to a renewed contraction. In China and other emerging economies, the deceleration in growth has been greater than anticipated, reflecting past policy tightening and weaker external demand.  This slowdown in global activity has led to a sizeable reduction in commodity prices, although they remain elevated. The combination of increasing global excess capacity over the projection horizon and reduced commodity prices is expected to moderate global inflationary pressures. Global financial conditions have also deteriorated since April, with periods of considerable volatility. The Bank’s base case projection assumes that the European crisis will continue to be contained, although this assumption is subject to downside risks.

Economic events for the month of August affecting CAD






Aug 7



Building Permits m/m





Ivey PMI


Aug 9



Trade Balance


Aug 10



Employment Change





Unemployment Rate


Aug 17



Core CPI m/m


Aug 22



Core Retail Sales m/m


Aug 31



GDP m/m



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