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Canadian Dollar: Higher Inflation To Support Speculation For Rate Hike

Canadian Dollar: Higher Inflation To Support Speculation For Rate Hike

2010-05-14 23:02:00
David Song, Currency Strategist
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The BoC has shown an increased willingness to normalize policy further this year as the central bank sees the growth rate expanding 3.7% in 2010 amid an initial projection for a 2.9% rise in GDP, and higher inflation accompanying the rebound in economic activity will certainly give the governing board scope to raise borrowing costs as it aims to balance the risks for the economy. Consumer prices are anticipated to rise 0.2% in April after unexpectedly holding flat in the previous month, while the headline reading for inflation is expected to rebound to 1.7% after slipping to an annualized pace of 1.4% in March. In addition, the core rate of inflation is projected to tip 0.1% higher during the same period after contracting 0.2% in the month prior, with prices excluding volatile items such oil and transportation costs forecasted to increase 1.8% from the previous year, and mounting price pressures could add to expectations for a rate hike in May as inflation approaches the 2% target.

 
However, retail spending is expected to hold flat in April despite the record jump in employment, while demands for Canadian securities is expected to grow at a slower pace in March, and the data could lead the BoC to hold a neutral policy stance next month as the marked appreciation in the exchange rate continues to drag on the economic rebound. Nevertheless, as risk trends continue to dictate price action in the currency market, uncertainties surrounding the global outlook may continue to weigh on risk sentiment and push the Canadian dollar lower against the greenback as its U.S. counterpart benefits from safe-haven flows. - DS
 
 
 

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