CAD was seen lower after a key survey of Canadian economic strength suggests activity might have peaked.

The Pound-to-Canadian Dollar exchange rate trades at 1.6653, up from a daily low of 1.6558. The US-to-Canadian Dollar exchange rate trades at 1.2538 having been as low as 1.2469 earlier today. The Euro-to-Canadian Dollar rate is at 1.4798, up from a low of 1.4699.

The release of the BOS forms one of the key risk events for the Canadian Dollar this week as the survey forms one of the most comprehensive insights into Canadian economic activity and informs future Bank of Canada interest rate policy.

That the BOS suggests business optimism has peaked hints that the Bank of Canada might pursue a more relaxed stance towards raising interest rates. Recall the CAD rallied sharply through the mid-year period as the Bank raised interest rates to 1.0%.

The BOS reveals the balance of opinion for future sales fell to +19, this down from +31 in the prior quarter and the lowest so far this year.

Analysts caution that because of the way the future sales question is worded, asking if growth is expected to accelerate or decelerate compared to the prior twelve months, some pullback should have been expected given that the last twelve months was already a period of strong growth.

“So that isn't much of a concern. Neither is the pull-back in hiring intentions from a high +58 to a still healthy +34, particularly as respondents also noted a rise in the intensity of labour shortages which suggests firms are trying to hire and may be an indicator of higher wage inflation in the future,” says Andrew Grantham at CIBC Economics.

Grantham does warn that the one area that may be a little more concerning for policymakers is the pull-back in investment intentions, to a balance of +17 from +29.

“Recent communication from the BoC has been more positive regarding investment than we were seeing the data, and the pullback here may see some reassessment of that,” says Grantham.

Overall though CIBC Economics reckon most indicators are still pointing to a healthy economy, “but like the official data recently are coming off the highs of an extremely strong first half,” says Grantham.

The question of the future of NAFTA - owing to US President Donald Trump's 'America First' agenda - is one area of concern to watch going forward. Indeed we have on a number of occasions identified it as a potential threat to CAD valuations going forward.

"Firms indicated improved foreign demand despite uncertainty surrounding U.S. trade policies. This uncertainty may have intensified since the completion of the survey mid-September with growing risks that NAFTA renegotiation may fail," says Paul Ferley, Assistant Chief Economist with RBC Capital Markets.

However, Ferley notes comments by the Bank of Canada that today’s report is indicative of “business activity becoming entrenched” points to the strong likelihood of the Bank of Canada continuing to withdraw the current highly stimulative monetary conditions.

RBC Capital markets forecast the Bank of Canada's overnight rate to rise a further 100 basis points to 2.00% by the end of 2018 with the next hike expected in December. If correct, this should keep CAD well supported.

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