Rising Canadian Inflation Would Validate The Bullish Loonie Technical Outlook

Published April 17th, 2009 - 08:31 GMT

Canadian consumer prices in March are expected to have risen 0.4% during the month but remained flat at 1.4% on an annualized basis. Last month’s unexpected rise was due in part to a 1.3% increase in transportation costs as fuel prices have started to stabilize which been the main driver of lower prices.





Fundamental Outlook

Canadian consumer prices in March are expected to have risen 0.4% during the month but remained flat at 1.4% on an annualized basis. Last month’s unexpected rise was due in part to a 1.3% increase in transportation costs as fuel prices have started to stabilize which been the main driver of lower prices. The February manufacturing shipment report showed that automobile demand rose which could have led to increasing prices for them. However, that demand isn’t expected to be sustained as the economy continues to shed jobs as factories are forced to cut costs due to weakening demand for exports. Meanwhile, the core inflation rate is expected to also remain flat at 1.9% which is where the BoC will focus.  The central bank has a target of 2% and if prices continue to fall below, it will strengthen the case for quantitative easing. There is already mounting pressure for the Governor Carney to follow the Fed and BoE and start buying government debt in order to defend its inflation target. Therefore, a drop in prices could raise the chances that the central bank starts printing money which could lead to “loonie” weakness. However, if we see inflation stabilize or rise then this could eliminate the need for aggressive actions from the central bank which would validate the bullish Canadian dollar technical outlook.


Technical Outlook



The drop beneath 1.2020 most likely confirms that 5 waves are complete at 1.3068 and that a deeper correction of the advance from .9055 is underway.  The strategy will be to sell rallies and former support at 1.2190 is now potential resistance.  The next support level is the 200 day SMA (in red).

For More Technical Analysis Visit the Daily Technical Report

To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com

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