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Canadian Dollar Could Gain if BOC More Hawkish than Expected

The European periphery continues to come under pressure with yields of Italian and Spanish debt trading at stressed levels while threats of a US rating downgrade has prevented the US dollar from making substantial gains. The Canadian dollar looks set for further gains given market positioning and increased inflationary pressures.

Today’s Key Economic Data Events:

EUR – German ZEW Economic Sentiment – 09:00 GMT
Expectations: -11.8. Previous: -9.0.
Today’s German ZEW survey is expected to show declining economic forecasts as the European debt crisis weighs on future sentiment of analysts and investors. The euro is susceptible to events surrounding the debt crisis and public comments by European leaders as Thursday’s European summit approaches. ECB President Jean-Claude Trichet was firm in his opposition to any selective default by Greece. Initial resistance for the EUR/USD comes in at the 100-day moving average at 1.4290. Support is found at last week’s low of 1.3835.

USD – Building Permits – 12:30 GMT
Expectations: 0.61M. Previous: 0.61M.
US Housing numbers are forecasted to remain week but FX investors will likely be focusing on the US debt crisis. Last week S&P put the US on credit watch with negative implications. S&P said, “There is at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days.” Cable has resistance at the falling trend line from the April high which comes in at 1.6225. Support is located at last week’s low/38% Fibonacci retracement of the May 2010 to April 2011 move at 1.5780.

CAD – BOC Overnight Rate/Rate Statement
Expectations: 1.00%. Previous: 1.00%.
Consensus forecasts are for the BOC to hold Canadian interest rates steady though price action of the USD/CAD suggests the forex market expects otherwise. The BOC may use a more hawkish rhetoric given the spike in inflationary pressures during the month of May. Core CPI increased 0.5% while headline inflation jumped to 0.7%. The CFTC Commitment of Traders Report also shows speculators have once again turned bullish on the Canadian dollar. Initial support for the USD/CAD is found at 0.9520 and a break here will likely test the May low at 0.9444. Resistance comes in at 0.9780.

Read more forex trading news on our forex blog.

By Russell Glaser

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.