Forex Investment and Currency Trading

Overnight Spot Trading Activity: Weak CPI Data Fails to Weaken CAD

Asia: USD/CAD hovered around parity as the North American session began, with the market shrugging off weaker than expected CPI data. Prices traded with a bid tone in early Asian trading, as USD/CAD sliced through interbank selling interest near 1.0010 to a high of 1.0025 on short covering flows. However, the rally stalled here for a pullback toward 1.0010 ahead of the London open.

London: Prices returned to 1.0025 after London trading began, with interbank accounts noted buyers. However, this was followed by a return to 1.0010, where option-related buying interest was offset by interbank offers that took prices through parity. With 0.9994 serving as the low for the move, the lack of significant follow-though below yesterday’s North American low (1.0002) and the Asian low (1.0001) soon caused a return above 1.0110, with interbank short covering and fund buying interest noted to a high of 1.0051. Weaker than expected March Canadian core CPI data (0.2%m/m, cons. 0.3%m/m) caused a brief spike to 1.0062, but this was met with broad-based selling interest back down to parity.

U.S. Philly Fed and Leading Indicators Data to Provide Event Risk Today

With the Canadian CPI data in the rear-view mirror, the April Philly Fed Manufacturing Survey and March leading indicators data will provide the main event risk for the market. The Philly Fed Survey is expected to improve from -17.4 in March to -15.0 in April, while leading indicators are expected to improve from -0.3 in February to +0.1 in March. While this outcome is expected to provide the USD with some support, recent price action in USD/CAD highlights the downside as the path of least resistance.

Short-Term Outlook: Resistance at 1.0041/1.0066 Expected to Limit Retracements

Valuation-driven retracements to resistance between 1.0041 and 1.0066 are expected to attract selling interest for a move toward the support level at 0.9946.

Medium-Term Outlook: Retracement Support Located at 0.9980 and 0.9724

With the daily study valuations moving from overbought to neutral levels, uptrend support at 0.9980 and 0.9724 is expected to attract medium-term buying interest for a return to congestive resistance at 1.0343.

The year-over-year all-items inflation rate slid further in March to 1.4% - the slowest pace since January 2007. The Bank of Canada’s core inflation rate, CPIX, edged down to 1.3%, slightly lower than expected. On the month, the all-items index rose 0.4% in March relative to February while the CPIX rose 0.2% on the month, less than half the pace of February’s 0.5% rise.

The monthly increase in the all-items index reflected higher energy prices with gasoline costs rising 3.6% and an 8.6% jump in the price of other fuel oils. Higher prices for women’s clothing (+3%) and a 0.6% rise in mortgage interest costs also supported the monthly gain. Once again the costs of vehicle purchases and leases declined (-0.8%) due to higher incentives. Traveler accommodation prices also slipped (-2.8%) after posting a strong gain in February.

On a year-over-year basis, the primary contributor to the 1.4% rise was mortgage interest costs which were 8.3% higher than a year earlier, a pickup from February’s 8.1% pace. The annual increase reflected an unfavourable base year effect (prices rose only modestly in March 2007) and higher prices of new housing rather than a change in interest rates. Homeowners’ replacement costs were 4.8% above the March 2007 level, the same as in February. Higher gasoline prices (up 7.9% relative to March 2007) also contributed to the annual rate, although this pace was much slower than February’s 17.1%. Costs of other fuels rose at the fastest pace since September 2005. Costs for the purchase/lease of motor vehicles, however, were 7.1% lower than a year earlier reflecting dealer incentives and lower manufacturers’ suggested retail prices compared to March 2007. Prices for computers continued their downward trek and were 14.9% lower than in March 2007 while the prices of fresh fruits and vegetables fell as the strong Canadian dollar depressed the prices of imported food. While goods prices posted a hefty 0.7% monthly increase, they ran 0.6% lower than in March 2007 while services prices posted a 0.2% monthly rise and were 3.3% higher than a year earlier.

Both the core and all-items inflation rates ended the first quarter near the low end of the Bank’s 1% to 3% target band giving the Bank leeway to keep policy geared toward mitigating the downside risks to Canada’s economy coming from the steady weakening in the pace of US growth and rising cost of capital. The all-items rate averaged 1.8% in the first quarter, slightly faster than the Bank’s 1.7% forecast while the core measure averaged 1.4%, right on the Bank’s projections.

Market expects the downside risks to the economic outlook to hold sway at next week’s meeting of the Bank’s Governing Council and look for a 50 basis point cut in the target for the overnight rate to be announced. While many recent indicators point to Canada’s domestic economy growing at a decent pace early in the year, there are signs that the economy’s momentum is fading with the recent Bank of Canada’s business outlook survey signaling less optimism about future sales and investment growth. Additionally, the survey showed that 41% of respondents faced tighter credit conditions. Against the benign inflation backdrop, the Bank is expected to focus on the downside risks to the economic outlook when they make their decision on interest rates next week.