Today's data from Canada was mixed. The leading index was weaker than expected showing a flat reading for August when expectations had it climbing 0.2%. The previous month's reading was revised lower as well. Wholesale sales for July meanwhile were up 0.8%, around economists forecasts.
On top of those data releases, we saw the IMF lower its growth forecast for Canada. It now expects Canada's GDP to grow 2.1% in 2011 and 1.9% in 2012, slower than the previous forecast of 2.9% in 2.6%, respectively.
That would mean that's any expectations of interest-rate increases by the Bank of Canada it would have to be tempered with the prospect of weaker growth. The slowing US economy can act as a major drag on Canada's GDP as the US is Canada's main trading partner.
Recent data has shown they economy shedding jobs in the month of August (-5.5K compared to forecast +23.4K) as well as a weaker reading for housing starts (185K vs. 200K expected). Also the capacity utilization rate fell for the second quarter.
See more on Canada's fundamental data at our Canada Country Profile Page.
The Canadian government is also withdrawing fiscal stimulus, and that fiscal tightening may also have an impact on growth rates. The IMF said the government can continue to remove stimulus but has room to pause because it's financial situation is better than in the US.
On the fundamentals, the USD/CAD may see itself heading back to the parity level, though anticipation of the FOMC announcement tomorrow may keep any USD gains limited. However, looking at the medium term picture, the expectations of an interest rate increase from the BOC is now being pushed further into the future (a negative fundamental shift for the CAD) and the more weakness we see in the US, the weaker the Canadian Dollar will be as a result of the growth and financial spillover from its southern neighbor.
At 11:30AM ET, Bank of Canada Governor Mark Carney is scheduled to deliver a speech on recent economic developments.
For more on the USD/CAD see the Technical Update: USD/CAD Forecast: Channel Break Signals Retest of Parity
Chief Market Analyst