Published: Fri, 17 Apr 2009 14:22:02 +0200

Higher Canadian Inflation Does Not Provide Much Support for Canadian Dollar

(CEP News) - Rising Canadian inflation is not providing much support for the Canadian dollar on Friday as it remains under modest pressure against the greenback.

Although the U.S. dollar is up on the day against the loonie, the cross has struggled to make gains through most of the session. USD/CAD has been unable to hold gains past 1.2150 CAD. Through most of the session the cross has bounced between support at 1.2065 CAD and resistance at 1.2158 CAD.

The cross is now stuck in the middle of today's range, hovering in the lower-1.21 CAD area.

Currency markets ignored stronger than-expected core Canadian inflation. The Bank of Canada's core Consumer Price Index (CPI) rose 0.3% in March, more than the 0.2% rise expected by economists and following the 0.5% gain in February, Statistics Canada reported. The annualized rate also moved higher, rising 2.0% in March, higher than the 1.9% consensus forecast.

Although core inflation is stronger than expected, according to economic strategists, the Bank of Canada will still have room to act aggressively to support the faltering economy.

On April 21, the Bank of Canada will hold its monetary policy meeting. Dawn Desjardins, assistant chief economist from RBC Capital Markets, said she is expecting the central bank to release some information on a program that would help them inject liquidity in the financial system.

"Though the platforms will be announced, the Bank may well refrain from implementing their plan immediately as they assess whether the recent "green shoots" of stability in markets and some parts of the economy will grow as a healthy dose of fiscal stimulus is applied," she said.

Although the Canadian dollar is losing ground, the loonie remains at the top of its recent channel. The USD/CAD has been on a strong downward trend since April 13. The selloff came to a halt after the loonie hit a three-month high Thursday morning.

Tyson Wright, senior currency trader at Custom House said he is expecting to see some consolation in the USD/CAD after the recent sharp selloff. He added he will be watching for a break above 1.22 CAD to confirm that the recent selloff is finished.

"I think the Canadian dollar has gone as far as it can go for now. I think we will see some profit taking ahead of the Bank of Canada rate decision. At this time I would prefer to buy U.S. dollars on any dips," he said. "I don't think the 1.2050 (CAD) level offers strong resistance but we could see some consolidation there before we move higher."

Matt Perrier, currency analyst from BMO Capital Markets said some of the technical charts show the USD/CAD is oversold in the short term and there may be further gains in the short term. He added he is expecting 1.2190 and 1.2218 to offer near term resistance.

"Only a break and close below yesterday 1.1982 lows would negate corrective bounce scenario and (would) suggest we (could) see a move towards 1.1750," he said.

Euro/USD down 1.24 cents to 1.3061

USD/CAD up 0.32 cents to 1.2105

USD/Yen down 0.00 points to 99.28

GBP/USD down 1.18 cents to 1.4809

AUD/USD up 0.10 cents to 0.7216

Euro/Yen down 1.24 points to 129.66

Euro/GBP down 0.14 pence to 0.8819

GBP/CAD down 0.87 cents to 1.7931

CAD/Yen down 0.22 points to 82.02

Euro/CAD down 1.07 cents to 1.5812

The U.S. Dollar Index is up 0.58 points to 85.81

All data taken at 8:20 a.m. EDT

By Neils Christensen, neilsc@economicnews.ca, edited by Megan Ainscow, mainscow@economicnews.ca