The Canadian Dollar finished the week only marginally lower against the resurgent US Dollar, riding a wave of positive economic data to withstand the impressive USD rally. An early-week Leading Indicators report set the tone for the following data as it came significantly above consensus forecasts. The next day’s Manufacturing Sales data similarly trounced consensus estimates, and it seems that broader economic data points to a healthy recovery in Canadian growth trends. The holiday-shortened week ahead promises two potentially market-moving pieces of economic event risk, and relatively illiquid market conditions may make for exaggerated exchange rate moves. Whether or not the Loonie can continue to hold its ground may very well depend on the outcome of Retail Sales and Gross Domestic Product data. Recent Wholesale Sales data produced a smaller-than-expected increase in purchases through the month of October, and the Wholesale-Retail dynamic suggests we may see similar disappointments on the coming Retail Sales report. Indeed, surprises in the Wholesale data have frequently predicted the outcome of the subsequent Retail data—pointing to downside risks ahead of Monday’s release. Subsequent Gross Domestic Product figures will give further insight on the health of the domestic economic recovery, and consensus forecasts call for the second consecutive month of expansion. The Canadian Dollar is typically moves far less on surprises in monthly GDP figures as compared to the more-accurate quarterly numbers, but traders should keep a close eye on the potential for a negative GDP print for October. Suffice it to say, material surprises to the downside could shake recent optimism on the state of Canada’s recovery. Traders should otherwise be careful of unexpected volatility on illiquid currency market conditions. Though holiday-shortened weeks often produce dull price action on limited market participation, there are clear exceptions and limited liquidity can introduce poor trade execution and outsized losses. Canadian dollar traders should be mindful of especially large moves in commodity markets. Though the CAD’s correlation to Crude Oil has somewhat diminished through recent trade, the USDCAD would likely move on substantial shifts in raw materials prices. Read more: DailyFX - Canadian Dollar Risks to Downside Ahead of Retail Sales Data http://www.dailyfx.com/forex/fundamental/forecast/weekly/cad/2009-12-19-0242-Canadian_Dollar_Risks_to_Downside.html#ixzz0a6nCK7SY

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