Published: Wed, 15 Apr 2009 15:45:31 +0200

Momentum Continues to Support Canadian Dollar

(CEP News) - The Canadian dollar continues to be one of the best performers despite broad-based gains by the U.S. dollar and more negative sentiment in financial markets.

The risk aversion dominating currency markets is not supporting USD/CAD, as the cross remains under pressure. The Canadian dollar is the second best performer against the U.S. dollar - second only to the British pound - among G10 currencies.

The U.S. dollar saw broad gains following higher-than-expected core CPI data. However the rally in USD/CAD was short-lived and the cross remains near the bottom of today's channel in the low 1.21 CAD area.

The seasonally-adjusted core U.S. Consumer Price Index, which excludes volatile food and energy prices, saw a 0.2% month-over-month jump in March, slightly more than the 0.1% rise expected by economists. On an annual basis, core inflation rose 1.8%, against expectations for a 1.7% rise. Headline inflation fell 0.1% in the month, against expectations of a 0.1% rise, bringing the annual rate to -0.4%, against expectations for a -0.1% reading.

Lower-tier Canadian data released at the same time is having little impact on the loonie. Sales of new cars in Canada declined by 2.2% in February compared to January, with 115,187 vehicles sold by dealers, according to a report from Statistics Canada on Wednesday.

Overnight trading saw USD/CAD hit session highs at 1.2186 CAD. With the cross trading below the key level of 1.22 CAD, some currency strategists are expecting to see further gains in the Canadian dollar.

Matt Perrier, currency analyst from BMO Capital Markets, said there is a risk that the USD/CAD falls further to the 1.20 CAD level, which he said appears to be a good U.S. dollar buying opportunity.

Jacqui Douglas, currency strategist from TD Securities, said at the moment the Bank of Canada is in no hurry to initiate quantitative easing measures, which will continue to support the Canadian dollar in the short term.

"After the recent (and previous) rejections of the 1.30 area, we think the medium term target for USD/CAD is the upper 1.17 area from January this year; we think there is also a good chance that the move extends beyond that to test the November low (upper 1.14s)," she said.

Currency strategists from CIBC World Markets said there appears to be no floor in USD/CAD at the moment, and they look to buy more Canadian dollars at 1.2025.

"With yesterday's close below 1.2150 we move to the sidelines, retaining a more neutral medium-term view," they wrote.

Euro/USD down 0.92 cents to 1.3167

USD/CAD down 0.16 cents to 1.2137

USD/Yen up 0.42 points to 99.39

GBP/USD up 0.38 cents to 1.4932

AUD/USD down 0.60 cents to 0.7178

Euro/Yen down 0.38 points to 130.86

Euro/GBP down 0.84 pence to 0.8818

GBP/CAD up 0.23 cents to 1.8125

CAD/Yen up 0.45 points to 81.89

Euro/CAD down 1.31 cents to 1.5980

The U.S. Dollar Index is up 0.67 points to 85.31

All data taken at 9:40 a.m. EDT

By Neils Christensen, neilsc@economicnews.ca, edited by Ernest Hoffman, ehoffman@economicnews.ca