U.S. Dollar, falling 2.06 percent against its southern neighbor. A mixed batch of data over the week certainly didn’t help the Loonie, and with the bulk of poor data coming in during the latter half of the week, it is of no coincidence that the Loonie lagged the commodity complex rally on Friday.

Speaking of the commodity complex, part of the reason why the Loonie has been so well-supported during recent times of stress has been due to its significant correlation with Crude Oil. As the number one exporter of oil to the United States, the USD/CAD typically sees downside pressure when the American economy is growing and oil is relatively expensive. As such, with American data better-than-expected in recent weeks, and tensions once again rising in the Middle East, the Canadian Dollar has remained firmer than the other commodity currencies, the Australian and New Zealand Dollars.

Looking ahead to next week, there are a few pieces of data on the docket that stand out as prime opportunities to generate volatility in what is otherwise expected to be an exceptionally quiet week. Inflation data is due on Tuesday, and while the headline figures are expected to show that inflation moderated, the Bank of Canada’s core reading is forecasted to show a slight bump to 2.2 percent from 2.1 percent, on a yearly basis. Another bout of saber-rattling in the Middle East coupled with higher price pressures could create the perfect storm for a Loonie rally on Tuesday, or at least insulated losses in the event of a sharp move to the downside revolving around a wave of European sovereign downgrades.

The other events on the week worth mentioning are the retail sales figure and the growth figure from October. Both figures are expected to show slight contractions, a sign that the Canadian economy is slowing. In regards to the latter, Canadian growth is forecasted to have increased at a meager 0.1 percent rate in October, from 0.2 percent in September, on a monthly basis. Similarly, growth is forecasted to have slowed to 2.7 percent year-over-year in October, from 3.0 percent in September. Softer prints across the board fall in line with the BOC’s decision to keep its accommodative policy in place, per the central bank’s rate decision last week.

Given the market’s expectation that Standard & Poor’s will strip the core Euro-zone countries – France and Germany, most notably – of their AAA ratings, our initial fundamental forecast is to look for further Loonie weakness. If no downgrades come, and Euro-zone conditions don’t deteriorate further, the USD/CAD could find some offers lower. Clearly, the picture is muddled at best, which is why we take a neutral bias, leaning bearish, for the coming periods ahead. –CV

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