USD/CAD – Loonie Takes Short Flight Higher On Sales and Hotter CPI

Most dollar bulls have had a nightmare of a week plying their trade in the CAD currency market. Before the BoC rate announcement midweek, the loonie had been trading in a relatively contained range for the past three-months (CAD$1.2384-$1.2794). The market needed to break the range with conviction for any new directional bias. The CAD bull found support on two fronts, the price of crude rallying to test yearly highs and Governor Poloz’s optimistic policy statement got the ball rolling.

Aiding the loonies’ flight has been the big dollar underperforming across the board following a run of softer U.S economic data that had the market readjusting the probability of a Fed tightening as soon as June. Even the probability of September hike has been lowered this week. The softer economic data seems to be creating some uncertainty among the FOMC members about the timing of the liftoff in rates and reason enough for the dollar bulls to be back peddling at the moment.

BoC more optimistic than expected

There was a sliver of hope amongst the CAD bears that the Governor would surprise and possible ease again. The USD bulls were primed and ready to go higher just before the BoC announcement (CAD$1.2557). However, since the BoC kept its overnight rate at +0.75% as expected and indicated it believes the negative economic effects of lower oil prices will not be more severe had the loonie doing a hard U-turn.

On Friday, the CAD rallied hard (intraday low of CAD$1.2088) after February retail sales data (+1.7% vs. +0.5% expected) and March CPI data (annual core +2.4% vs. +2.1%) came in much stronger than expected. The loonie has since surrendered all of its gains and then some (CAD$1.2210), vindicating those warning about a lack of liquidity and market positioning intensifying CAD’s swings of late. The loonie is not alone and has since given in to broad strengthening of the USD after U.S core-CPI and Prelim UoM Consumer Sentiment (95.9 vs. 93) came in stronger than expected. The headline m/m CPI reading of +0.2% was lower than expected, however the core y/y CPI reading was a robust +1.8%, beating expectations for +1.7%. U.S March CPI inflation data strongly suggests that their inflation cycle may be turning, providing support for Fed rate hikes sooner rather than later.

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