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Canadian Dollar Depreciates as Deflation Accelerates in June

Canadian Dollar Depreciates as Deflation Accelerates in June

Christopher Vecchio, CFA, Senior Strategist

THE TAKEAWAY: CAD Consumer Price Index (JUN) > M/M: -0.4% versus -0.2% expected, from -0.1% > Y/Y: +1.5% versus +1.7% expected, from +1.2% > USDCAD BULLISH

Price pressures are waning in Canada, at least in the short-term, according to the most recent inflation data report. The June Consumer Price Index was mixed overall, with the year-over-year readings show increased price pressures in both the Core and the headline readings, but investors have focused on the monthly-basis prints thus far.

In June, prices contracted by 0.4% from May, when they contracted by 0.1%, well-below the estimated 0.2% contraction, according to a Bloomberg News survey. The Bank of Canada Core CPI reading showed the results, with inflation at -0.4% in June from +0.2% in May. The y/y readings showed weakness as well, with the headline reading showing inflation of +1.5% in June below the +1.7% consensus forecast; and the Core reading showed +2.0% y/y versus +2.3% expected.

USCAD 1-minute Chart: July 20, 2012

Canadian_Dollar_Depreciates_as_Deflation_Accelerates_in_June_body_Picture_1.png, Canadian Dollar Depreciates as Deflation Accelerates in June

Charts Created using Marketscope – Prepared by Christopher Vecchio

The Canadian Dollar has taken a hit on the data, which suggested that deflationary conditions are starting to set in. Given the relationship between inflation and interest rates, the weaker price pressure readings suggest that interest rates should be lowered, which thereby reduces a currency’s prospective yield going forward. Traders have adjusted their bets on a rate hike over the next 12-months by the Bank of Canada, with the Credit Suisse Overnight Index Swaps pricing in a 7.2% chance of a 25-bps rate cut now as opposed to a slightly weaker 5.6% chance earlier today.

Accordingly, the USDCAD has responded positively (CAD negative), climbing from just over 1.0100 ahead of the release, to as high as 1.0125 soon after. The USDCAD has retraced some of its gains, however, falling back to 1.0116, at the time this report was written.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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