Week In FX Americas - No Loonie Inflation Worries

Includes: FXC, FXCH, FXE, UDN, UUP
by: Dean Popplewell

Inflation is very much a "non-issue" for Canada and its other G7 members. Canadian annual consumer prices accelerated last month to a four-month high, driven by some of the usual suspects -- the costs of gas and vehicles. However, the elevated 1.2% year-over-year rate remains well below the Bank of Canada's threshold of a 2% inflation target. This very much supports the dovish tone expressed by the BoC's new Governor Poloz earlier this week. This would suggest that there is no immediate pressure on policy makers to hike rates anytime soon.

The core rate, excluding food and energy, dropped 0.2% m/m, but was up 1.3% y/y, from 1.1%. The news saw short-term rates slightly lower with two-year yields touching their 200-DMA of 1.08%. The rate differentials would benefit the dollar bulls outright; however, selling by the techs has dominated most of Friday's action. The commodity bulls and their underlying assets are very much in tow supporting them.

Historically, the loonie is known as a commodity and interest-rate- sensitive traded currency. This week, both crude oil and gold have helped the currency to end on a high. Crude oil had gains of $3.50 on the week and close to $12 on the month, while gold is also rallying for a second day. The yellow metal's prices are bumping up against their two-month moving average, an effective resistance point since last February.

The dollar bears are expected to get braver only below Wednesday’s low of 1.0355. Otherwise, this currency pair is doomed to another contained G7 trading range.