Weekly Outlook: Can OPEC Output Cuts Drive Loonie Higher?

The Canadian dollar will likely continue to trade off of developments in the price of crude oil, as a light week of data is unlikely to change fundamental outlook on the worlds eighth largest economy. Indeed, the only notable economic release will come on Monday, with government officials due to report levels of Retail Sales growth through the month of August.

Analysts predict that the report will show consumers spent purchased 0.8 percent more in the retail sector, with annual growth continued above the 5 percent seen in July. Such predictions give weight to fears that strong consumer spending will boost inflation and push the Bank of Canada to raise rates once more by years end. Though BoC rhetoric has been far from overtly hawkish, rising core consumer price inflation has pushed synthetic forward rates considerably higher through December. Futures markets currently show an approximately 30 percent chance of such a hike in the next two months?a far cry from previous expectations of a rate cut by the first quarter of 2007. We shall look at Mondays retail sales report for clearer indication of domestic consumer strength, with a substantively worse than expected figure likely to force the Loonie lower against itsUS counterpart.

In other relevant Canadian dollar news, currency traders will continue to monitor developments in OPECs planned output cuts to gauge the likelihood of further declines in oil prices. The oil producer cartel recently announced that it would cut output by a total of 1.2 million barrels per day, but markets seemed unconvinced that member countries would follow through on their pledges. Indeed, crude oil fell to fresh 11-month lows by the end of Fridays trading despite the strongly-worded OPEC rhetoric. The commodity price likewise weakened after Russian officials announced that they would not follow suit in cutting production. As the worlds second-largest exporter of the energy source, Russia s reluctance to reduce output certainly worsens prospects of higher prices in the medium term.

Falling oil prices have yet to make an impact on the Canadian dollar, as it finished near two-week highs against its US namesake by Fridays close. Regardless, traders may reduce speculative long positions if oil fails to rebound in the coming week of trading. Indeed, some analysts feel that risks remain to the downside for the Loonie, with any bearish news likely to spark US dollar strength in the USDCAD currency pair.

Economic releases for the week of October 23-27