Though it may be difficult to identify, risk trends have a distinct influence on every currency in the market. However, the Canadian dollar is not the prototypical player in the carry trade. While the currency maintains an extraordinarily low interest rate, it is nonetheless group with the Australian and New Zealand dollars as a high-yielder. This association is largely derived from the commodity interests that the resource-abundant country exploits. On the other hand, in all but the worst reversals in risk appetite; the currency can decouple from those that are purely dependent on the winds of sentiment to define their path. This unique buffer is found in the underlying fundamentals and the potential it implies. Through the worst of the global crisis and recession, the Canadian economy weathered the slump relatively well and no national banks required public funds or bailouts to ensure stability. Now with the rest of the world advancing into its recovery, Canada is poised for a renaissance similar to that of Australia. And yet, the Canadian dollar has not enjoyed the same level of strength that its peer has. This may be due to the fact that Australia would fully avoid a technical recession where Canada wouldn’t or because of the interest rate differential.
Yields are a particularly interesting topic for the Canadian dollar going forward. According to Credit Suisse overnight index swaps, the market is pricing in only 66 basis points worth of policy tightening over the coming 12 months. However, data released these past few weeks suggests monetary policy officials can act earlier and more aggressively than what the market is accounting for. Just this past week, we have seen inflation (headline and core) maintain its steady ascent to meet the central bank’s target. Furthermore, retail sales and the leading indicators composite rose (a good compliment to the strong employment figures two weeks back) to indicate a strong domestic economy. We will garner a better appreciation for the health of the economy with the March 1st release of the 4Q GDP figures and the central bank’s expectations with the March 2nd rate decision. In the meantime, the fourth quarter current account balance will reveal whether trade will support domestic spending to further amplify growth.  - JK

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