Forex Investment and Currency Trading

• The BoC might not deliberately “talk up” CAD in either next week’s rate announcement or in the Monetary Policy Report Update. However, recent commentary from BoC Governor Carney leaves the clear impression that another inflation-busting CAD rally would be a welcome development.
• Along with a sharp improvement in Canada’s terms of trade, downside risks to USD/CAD will linger through Q3.
• The BoC is about to again sharply increase it oil price projections from US$109b for 2008 H2, and US$102/b for 2010 to around US$142/b for 2008 H2 and US$139/b for 2010. These revisions focus attention on Canada’s terms of trade, which are set to CAD-positively surge in forthcoming trade reports.

USD/CAD retains a neutral technical profile as prices wallow in a 0.9724-1.0343 trading range that has developed over the past 8 months. Despite the recent pullback, it is believed that a basebuilding process is underway – with support at 1.0053, 0.9991 and 0.9880 expected to attract buying interest in this regard for a re-test of resistance at 1.0243. While a close above this level would project additional gains to the top end of the trading range at 1.0343, prices must register a close above the 1.0343/1.0378 resistance zone in order to confirm the thesis. Conversely, a close below the bottom end of the range at 0.9724 would nullify the view.

BoC Concedes Fundamentals for CAD Rise In Place
The April MPR said “the trade-weighted CERI-ex US has declined by about 4.2%”since the (January MPR) Update, reflecting…concern about the negative effects of the US economic slowdown on the Canadian economy.” The terms of trade were listed as an upside inflation risk. Since April, CERI indices have been largely flat as commodity prices soared. The June 10 rate statement noted that “commodity prices have been sharply higher than expected,” and Governor Carney has argued that much of “the increase in most commodity prices is due to fundamentals.” In October 2005, the MPR noted that CAD strength “appears to be underpinned by fundamental factors, including high prices for crude oil and natural gas.” With fundamentals in place again the BoC won’t object to CAD strength.

Slightly Softer Employment
Canadian employment in June surprised to the downside with -5.0K jobs being lost compared to an expected increase of 8.0K. However, the job data were overdue for a correction after significant upside surprises earlier in the year. Surprisingly, the manufacturing sector did not shed any jobs after the outsized increase a month earlier and most of the job losses came from the service-producing side of the economy, with the “business, building and other support services” reporting the biggest decline (-17.8K). The softer employment data support the view of an unchanged BoC decision next week, accompanied by a “tight light” statement and further reinforcing the notion that the BoC will be comfortable with inflation-busting CAD strength.