cad fundamentals

Canadian Dollar Breaks to 7-Month Highs vs. the US Dollar Despite Drop in Canadian CPI to 14-Year Low

Wednesday, 20 May 2009 22:02:13 GMT  |  Terri Belkas, Currency Strategist

The Canadian dollar surged against the greenback, pushing USD/CAD below key support at 1.1500, despite the fact that headline Canadian inflation fell to a more than 14-year low. On a monthly basis, CPI surprisingly fell 0.1 percent in April while the annual rate dropped to 0.4 percent, the lowest since December 1994. However, the decline was due primarily to weaker energy prices as core CPI – which excludes volatile items – rose 0.1 percent, leaving the annual rate at 1.8 percent, down from 2.0 percent.

According to the Bank of Canada’s last Monetary Policy Report in April, the Bank is open to quantitative easing (QE) and credit easing if nominal interest rates start to fall below zero. The Bank stated that while they could cut rates to zero in theory, it would ultimately "eliminate the incentive for lenders and borrowers to transact in markets, especially in the repo market." As a result, inflation reports will be key to gauging whether the Bank of Canada will go the route of QE in the future, but with core levels of inflation holding at fairly robust levels, the risks remain pretty low.

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