Strong Canadian Employment data suggests that domestic economic conditions continue to improve, but it will be important to watch key Manufacturing and Consumer Price Index reports to get a better sense for key fundamental trends. The former is expected to show that Canada’s important Manufacturing industry saw sales expand by a healthy 0.6 percent through the month of January. Said report has never been known to produce sharp Canadian Dollar
moves upon release, but recent Loonie
strength suggests that any especially large disappointment could force a USDCAD bounce. End-of-week Consumer Price Index data should prove far more eventful—especially as the Bank of Canada’s preferred “Core” measure remains dangerously close to target levels despite the broader economic slowdown.
Analysts predict that Bank of Canada Core CPI grew by a 1.7 percent in the 12 months ending in February—just a hair short of the BoC’s official target at 2.0 percent. Recent surprises in Employment numbers and generally higher-than-expected core inflation leave the Canadian central bank in a difficult position. On the one hand, it seems premature to tighten monetary policy and raise interest rates while the current economic recovery remains fragile. On the other, stubbornly high inflation rates would likely pick up further steam if the economy returns to trend growth. Suffice it to say it should be interesting to watch for any especially large surprises and any official BoC commentary on the matter.
Impressive Canadian Dollar rallies leave the currency ripe for short-term pullbacks, but it is undeniable that momentum remains plainly in its favor. The clear danger remains that the USDCAD has fallen at an unsustainable pace; net Non-Commercial COT positioning is now at its most bearish extremes since the pair plunged towards $0.9000. As always, it is incredibly difficult to time reversals on one-sided positioning. Yet it is undeniable that any short-term USDCAD rallies could accelerate quickly as speculators close their one-sided trades. It will almost certainly be an exciting week for Canadian Dollar trading. - DR