Updated: Canadian Dollar Forecasts 2014 Warn CAD to Decline as Economic Outlook Deteriorates

At the time of writing we see the currency is consolidating following the July Bank of Canada (BoC) decision:

• The pound sterling to Canadian dollar: GBP/CAD is at 1.8384.
• The euro to Canadian dollar: EUR/CAD is at 1.4533.
• The dollar to Canadian dollar: USD/CAD is at 1.0737.

Be aware: The above quotes are taken from the wholesale markets, the numbers will attract a spread when passed on to consumers. An independent FX provider will however seek to undercut your bank's offer and deliver a rate that could yield up to 5% more currency in many cases. Please learn more.

Forecast: The Canadian dollar should struggle

In the wake of last week's poor labour market figures Shaun Osborne at TD Securities tells us he is forecasting the recent strength in the CAD to reverse:

"With market positioning in the CAD more neutral now and domestic data disappointing, the scene is set for a reversal in USDCAD’s recent weakness."

The labour market lost 9k jobs in June while the unemployment rate nudged higher to 7.1%.

Despite a bounce in full-time hiring, only 6 of 16 sectors reported higher payrolls led by the construction sector.  

Furthermore, foreign currency traders will have observed the decline in goods-producing jobs intensified in Q2, with the 3-month avg. at -9.6k vs -3.7k for the 6-month avg.  

The decline in manufacturing jobs also accelerated, from -5.8k in the 6-month avg. to -7.9k over the last three months.  

"Unless we observe a sizeable increase in productivity during the second quarter, this poor performance in manufacturing jobs would suggest a further delay in rotation towards exports as growth drivers.  Services also showed less momentum for job creation into the second quarter," says Osborne.

Scotiabank forecasting a return to strength in the US dollar vs Canadian dollar

Technical studies carried out by the forex team at Scotiabank confirm the forecast is deteriorating for the CAD at present:

"USD/CAD short‐term technicals are mixed but early signals are warning of upside risk. For near‐term traders we favour long USDCAD position leading into the BoC meeting on Wednesday, looking for a test up to 1.08 followed by an eventual test back up to 1.10—see chart. Near term support lies at Friday’s open at 1.0650."

Markets forget Portuguese banking concerns

European traders are EUR-optimistic at the start of the week. Insolvency concerns on Portugal’s Banco Espirito Santo dissipate as quickly as they appeared.

"As suspected, last week’s BES misadventure had no power to influence the sentiment in the Euro-zone; EUR/USD closed the week above 1.3600 and everything appears to be in order now," say Swissquote Research in a note to clients on Monday.

We are heading into a new event-full week. The main focus will be on FOMC Chair Yellen’s semi-annual testimony to the Senate and House on Tuesday and Wednesday.

We will be looking for a better understanding of how Fed sees the significant improvement in US labor data and when the firstrate hike could happen.

For the moment, we expect Yellen to keep her dovish stance, supportive of interest in carry strategies. Else, RBA will release minutes (Tue), BoJ and BoC give verdict (Tue&Wed) while the Canadian inflation report will be in focus on Friday.