Source: ForexYard
Today the BoC will release its interest rate decision and its accompanying statement. Canadian retail sales are also on the economic calendar though markets will be squarely focused on the BoC. The CAD has recovered nicely with the USD/CAD looking to move back below parity today.
Inflation is beginning to pick up in the developed economies of the world (US core 2.0% and UK 3.3%) and Canada is no exception to this phenomenon. Last week Statistics Canada reported a larger than expected jump in core Canadian inflation rising 0.5% m/m and 2.2% y/y. The BoC had previously forecasted inflation to be 1.9% y/y. The increased inflationary pressures will likely complicate matters for the BoC given the headwinds in the global economy with a slowing Chinese economy and a cloudy horizon in Europe which has been driving factor in the FX markets over the second half of the year.
The BoC is not expected to change its 1.00% interest rate nor should it adjust its neutral policy stance. Tomorrow the BoC will be releasing the central bank’s Monetary Policy Report and is could show a downgrade in Canadian growth expectations which would leave the BoC in a predicament; high inflation and sagging growth.
External factors to keep an eye on have been the price of crude oil which is beginning to show some strength in-line with other risky assets such as US equities and the AUD. Spot crude prices have risen to $93.60 and have retraced almost 50% of its 2011 decline. Crude oil strength could continue given improving market sentiment surrounding developments in Europe. USD debasing has also resurfaced with recent Fed comments hinting at the possibility of additional US monetary policy easing.
Speculators have built a nicely sized position against the CAD according to the latest CFTC COT report (see chart below). Though the amount of the bearish CAD position has been slightly reduced over the past week there is still room for significant short covering as CAD shorts may already have begun to feel the squeeze.
The USD/CAD move lower appears to be accelerating with the pair falling below parity for the first time since September 21st. The 55-day moving average contained yesterday’s price action though today the pair has moved through this support level. One level to keep an eye on is 0.9890 where the previously broken downtrend line from the 2010 high is located. Many times a previously broken trend line can act as a support/resistance level. The 61% retracement of the July to October move also comes in at this level. Just below here also rests the 100 and 200-day moving averages. The October 18th high of 1.0260 should serve as initial resistance followed by the Q3 high of 1.0660.
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