CAD drifting, Manufacturing Sales next

On Thursday, the Canadian dollar has posted small gains. In the North American session, USD/CAD is trading at 1.2147, up 0.11% on the day.

The Canadian dollar has been on a tear lately. USD/CAD has fallen 1.32% in May and the Canadian dollar hasn’t suffered a losing week since March. Canada’s economic recovery has been bumpy and lockdown restrictions remain in place, but the Canadian dollar has jumped on the bandwagon and posted impressive gains against a wobbly US dollar, which has struggled in the second quarter.

Canada releases Manufacturing Sales on Friday (12:30 GMT). The February reading hit a 6-month low, at -1.6%. However, we expect a strong rebound for March, with a consensus of 3.5%. If the release is within expectations, we could see the Canadian dollar respond with gains.

US CPI triggers inflation jitters

We’ve been hearing about inflationary pressures in the US for months, and the April inflation report confirmed these concerns. CPI was much higher than anticipated. Headline CPI jumped 4.2% year-on-year, up from 2.6% and above the estimate of 3.6%.

The surge in inflation has increased speculation that the Fed may consider reducing its asset-purchase programme of USD120 billion sooner rather than later. Such a tightening of policy would be bullish for the US dollar.

Investors are clearly concerned that higher inflation is not temporary, but how will the Fed respond? On Tuesday, prior to the CPI release, Fed Governor Lael Brainard said that inflation risks are a “transitory surge” and urged the Fed to remain patient and continue its ultra-dovish monetary policy. Brainard pointed to the weak nonfarm payrolls report last week as an indication that the US recovery still has a ways to go, saying that, “today, by any measure, employment remains far from our goals.”

There are voices calling for a re-examination of the Fed’s current policy, as Fed member Robert Kaplan stated recently. For the time being, however, the Fed remains committed to its ultra-accommodative policy. If upcoming inflation reports show that higher inflation appears to be sustainable, the Fed may have to backtrack and take a hard look at tapering QE.

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USD/CAD Technical

• On the upside, there is resistance at 1.2277 and 1.2427
• There is support at 1.2052. Below, there is support at 1.1977

For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-events/

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