USD/CAD Weekly Fundamental Analysis, September 14 – September 18, 2015 Forecast

Weekly Analysis and Recommendations:

The USD/CAD finished slightly lower last week, while posting an inside move on the weekly chart. This chart pattern typically means trader indecision, but it also indicates impending volatility. Longs reduced positions ahead of the Federal Open Market Committee’s (FOMC) monetary policy announcement on September 17. Some speculative buyers also increased their positions on the possibility the central bank will hike interest rates for the first time since 2006. This “push me, pull you” trading kept the Forex pair in a tight range most of the week. Falling oil prices were probably the biggest drag on the Canadian Dollar. 

The FOMC announcement is expected to have the largest impact on prices this week. An interest rate hike will likely drive up the U.S. Dollar against its Canadian counterpart. However, there is a high degree of uncertainty going into the Fed’s two-day meeting which begins on September 16. 

Some of the uncertainty is coming from inside the Fed. Members would like to see long-term inflation reach its targeted goal of 2% before it lifts its benchmark interest rate for the first time since 2006. However, there are hawkish members like Vice Chair Stanley Fischer who believe the central bank could normalize policy before it reaches the threshold. 

The dovish Fed members will vote against a rate hike because they believe the global markets are too unstable to handle a rate hike at this time. They cite the weakness in China’s economy, stock market volatility and dovish central banks as three key reasons for refraining from a rate hike at this time. A vote against a rate hike in September will push it later in the year with December the most likely date since the Fed holds a press conference that month. 

Members of the financial community including World Bank chief economist Kaushik Basu and the International Monetary Fund’s Christine Lagarde also weighed in on the Fed decision. Early last week, the World Bank’s Basu told the Financial Times that the Federal Reserve would spark “panic and turmoil” in emerging markets if it decides to raise interest rates this week. He added that the Fed should hold off on a hike until the global economy is more stable. “I don’t think the Fed lift-off itself is going to create a major crisis but it will cause some immediate turbulence,” he was quoted as saying. 

Lagarde from the IMF also cautioned the Fed that it shouldn’t rush its decision to raise interest rates and should move only when it is sure the decision is unlikely to be reversed later. “It (the Fed) should really do it for good, if I may say,” Lagarde said. “In other words, not give it a try and have to come back.” 

Last week, the Bank of Canada kept its key interest rate unchanged and said a weaker currency and household spending are leading a recovery from the shock of lower oil prices. Although recent data confirmed Canada’s economy contracted in the first two quarters of this year, the biggest two-month gain in exports since 2011 and creation of 193,000 jobs in the 12 months through August, suggest the economy may have already pulled out of its recession. 

Lower oil prices could weigh on the Canadian Dollar this week. On September 15, the Canada Real Estate Board releases resale homes data for August. Additionally, Statistics Canada releases manufacturing sales data for July on September 16 and the Consumer Price index on September 18. All of these reports could impact the USD/CAD, depending on how they line up with the estimates. 

Also on September 15, investors will get the opportunity to react to the latest U.S. retail sales figures. Core retail sales are expected to post a reading of 0.1%, down from the previous 0.4%. Retail sales are expected to come out at 0.4%, also down from the previous 0.6% reading. The Empire State Manufacturing Index could be the most volatile report this week. It is expected to be up 0.7 versus the previous -14.9. 

Wednesday’s month to month CPI report is expected to show a reading of -0.1%. Year over year Final CPI is expected to be 0.2%. Core CPI should come out at 0.1%, unchanged from the previous month. The Fed will have these figures when it starts its two-day meeting. 

Before the Fed announcement on Thursday, the U.S. will report on building permits, housing starts and the Philly Fed Manufacturing Index. 

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. 

Reports to Watch This Week:

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