The Canadian Dollar flexed its muscles to close the week up 200 points as the loonie now sits close to very strong support at 1.1050 against the US Dollar. Stronger than expected Canadian inflation was the primary driver for the move as the news sparked speculation about a possible return of interest rate action by the Bank of Canada sooner rather than later.
The loonies counter-currency partner added to the intensity of the fall as durable goods in the worlds biggest economy slipped 2.4% on the month while home sales continued to evidence a major impending market cool down, with new sales falling for the 3rd consecutive month. With second quarter Canadian GDP and consumption spending headlining this weeks economic releases volatility should fill out as loonie bulls continue to eye 1.1050 with ever-increasing hunger. Leading off the week, the current account surplus is expected to drop to C$6.1 billion from C$10.7 billion as merchandise trade appears set to once again be the main driver of the current account, as a rise in imports alongside a deterioration in exports will take a sizable chunk out of the current account surplus. Although an improvement in May and June export volumes suggests that the worst may be over for Canada's exporters, a slower U.S. economy is a source of risk in the second half. Of course further deterioration in the current account would be part of the normal adjustment process to the loonies recent strength. In other economic news, Canadas Industrial Product Price Index should rise for July as high gasoline prices look to headline the expected increase, however a drop in natural gas prices and easing of price action of the Loonie in July should provide some restraint in the numbers. If it should rise it would complement the previous core CPI figure, as a rise would highlight upside risk in underlying inflation for the upcoming quarter and quiet rumors of a possible rate cut by the BoC. Rising oil prices and underlying inflation should have limited impact on overall growth in the Canadian economy as GDP through the three months ending June is expected to run at a 3.3% pace versus 2.9% the previous period. More alarmingly, though growth is expected to slow in its annualized figure due to a sizeable drag in net exports, consumption is expected to bounce back above 3.0 percent in third quarter on the net effects of the goods and services tax cut.
The past week of economic data bolstered positive sentiment amongst loonie bulls as they managed to drive the USD/CAD pair down every day of the week on the back of strong expectations of upcoming growth numbers and hints of underlying inflation becoming a forefront issue for the BoC. Stronger than expected core inflation numbers, which excludes the 7 most volatile factors affecting prices, hinted at steadily increasing core inflation and initiated the momentous rally from 1.1250 down to 1.1050 as traders were forced to reevaluate their assumptions of a paused tightening schedule from the BOC for the rest of 2007. This was especially a bullish indicator given the reads were able to outpace expectations even though the sizable revision to the central bank and Statistics Canada reads produced hefty cuts. Meanwhile Mandamp;A flows continued to add capital into the Canadian economy and drive the USDCAD lower as deals like Rite Aid Corp. agreeing to buy Jean Coutu Group Inc.s Brooks and Eckerd pharmacy chains in the US for $2.55 billion in cash and stock offered sizable one-time currency exchanges and supported the notion of strong investor confidence in Canadas business sector. So far the 1.1050 level has held as strong support as oil prices slowly find their baring and a path back towards $75 per barrel. Oil prices could once again influence trading in the USD/CAD pair as past strong correlation between the asset heavy commodity currency and oil could reassert itself as economic indicators come from both nations come out head to head.
