Canadian CPI Accelerates More Than Expected, USDCAD Plunges

Overview
Consumer prices in Canada unexpectedly advanced in February amid higher costs for automobile insurance.  Annualized prices leapt 1.6% after climbing 1.9% in January, with economists expecting a rise of 1.4%, Statistics Canada showed today. Meanwhile, Bank of Canada’s core CPI, which the bank uses as a guide for future inflation trends accelerated 2.1% from a year ago, marking the fastest increase since December 2008.


Market Reaction
Immediately following the better than expected release, the USDCAD dived from 1.0166 to a low of 1.0100, while the yield on Canada’s benchmark 2-year bond soared 35 basis points. On the other hand, looking at the daily chart, the pair has pulled back from the 10-day SMA (1.0188), and now looks to test Wednesday’s one year low of 1.0069.  It is noteworthy that any further declines may be capped at parity as the RSI now tumbles to oversold levels.



Forecast
Following last week’s better than expected change in employment paired with today’s acceleration in consumer prices, Canada’s economy looks to be recovering. Still, the central bank has predicted that the economy will operate with “slack” through the middle of 2011. Meanwhile, Governor Mark Carney has pledged to keep borrowing costs at a record low of 0.25% through June unless the inflation outlook shifts. Looking ahead, investors are weighing in a zero percent chance that the central bank will raise interest rates twenty five basis points at its next rate decision meeting as policy makers aim to keep the overall annual inflation rate at 2%. 


Written by Michael Wright, DailyFX Research
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