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A Double Top in Oil Could Spell End For Canadian Dollar Rally

A Double Top in Oil Could Spell End For Canadian Dollar Rally

2010-03-18 18:56:00
John Rivera, Currency Analyst
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BoC Interest Rate Expectations
 
Overnight index swaps are now pricing in 101 bps of rate hikes over the next twelve months which it has been stick on since March 2nd. Consecutive months of job growth and consistent demand from abroad has raised the outlook for growth and raised speculation that the BoC will need to raise rates sooner than later. The central bank has pledged to keep rates on hold until June which we expect they will honor. However, they may be forced to begin tightening shortly thereafter of growth continues its current pace. Tomorrow’s CPI report is expected to show that consumer prices fell to 1.4% from 1.9% which would be well below the 2.0% target. The lack of a threat of inflation will allow policy makers to continue their measured approach and wait for cleared signs that downside risks have diminished.  Discuss this and trading ideas join the USD/CAD forum.
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FOMC Interest Rate Expectations
 
The FOMC left their benchmark rate unchanged while keeping the language, that rates will remain low for an “extended period”. Kansas City President Thomas Hoeing reiterates his objection and warned of creating asset bubbles. Despite the one objection, it appears the central bank will remain on hold into the second half of the year. However, the economic assessment from policy makers was a bit more upbeat as they touted increased business spending and a stabilizing labor market. It may not take a rate hike form the Fed to spark a longer-term dollar rally, as the mere removal of the “extended period’ language should suffice to sharply raise yield expectations. Fed funds futures are pricing in a 45.1% chance of a rate hike in September as markets are increasing believing that tightening may not come until 2011.
 
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Oil like most risky assets have seen their gains slowed as Greece’s issues doused prevailing risk appetite. Crude had previously surged higher on the back of OPEC deciding to leave their quotas unchanged which should put upward pressure on prices if we see an increase consumption start to pick up. However, we could be seeing a potential double top formation which is a signal of future losses. Discuss this and other fundamental data join the Economics Forum. 
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To discuss this report or be added to the email list contact John Rivera, Currency Analyst: instructor@dailyfx.com

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