Forex Investment and Currency Trading

A recent theme of market is that Canada is not as soft as the 2H 2007 inflation numbers and the December real-side numbers were suggesting. This was evident from some of the data released recently. Canadian headline inflation decelerated from 2.2% to 1.8% as expected, but there was considerable upside surprise in the core inflation rate which accelerated from 1.4% to 1.5%. The tamer headline rate arises from the base effect of a large increase in food (California frost) and energy prices from February 2007 dropping out of the year on year comparison. It is a bit surprising that food and energy were not more aggressively higher this February as well, but the detail shows that orange and grape prices plunged to offset gains in foodstuffs that are more notably traded on the exchanges.

The market consensus for the monthly core CPI inflation rate was always too low since the average February rise is 0.4% (this February it was 0.5%). The ‘dead in the water’. Canadian inflation trend in 2H 2007 is making something of a comeback so far this year. In seasonally adjusted terms, Canadian core inflation rose only 0.1% over the five months to
December but has risen 0.5% in the two months since. This is partly due to a reacceleration of house prices but also perhaps strong wage growth. There may be some additional core inflation in the pipeline if some of the recent auto incentives come off the books.

Canadian wholesale sales rebounded a stronger than expected 2.6% in January, including 3.3% in real terms. Real wholesale trade is already about 5% above its 4Q 2007 average. Statscan says: “Wholesalers shook off a disappointing December to start the New Year with a flourish”. A number of data are supporting the view that part of the weakness in December data was special factor related and we are seeing some January rebounds.

Consistent with last week’s paper about the benefits of a strong CAD, Statscan noted that: “With businesses continuing to take advantage of the strong Canadian dollar to invest in new machinery and equipment, prospects for this sector
remain positive. According to the latest Survey of Private and Public Investment, overall investment in machinery and equipment is expected to increase for a sixth consecutive year in 2008, up a further 5.7%.”