BOC will be forced to cut later
The focus in Canada next week turns to the retail sales release for July. Recall, it beat market expectations in two of the past three months, highlighting that the consumer continues to hold up weak in spite of the rise in inflation and drop in the currency.
In our view the wealth effect from the surge in the housing market continues to underpin consumer demand. Housing price gains have averaged nearly 2.0% a year over the past five years, helping insulate Canada to some degrees from the wobbles in the oil market. What's more, housing price gains have outstripped monthly GDP over the past few months, suggesting buoyant domestic demand.
Even so, we don't think solid consumption growth will be strong to offset the slowdown investment as oil prices will remain low for long.
In turn, we still think the BoC will be forced to ease again to help move along the economic rebalancing in an effort to boost manufacturing.
This argues towards continuing to buy USD/CAD with our outlook for 1.36 by year-end.
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