Mid-Day Report: Loonie Surges on Inflation and Retail Sales Data, Euro Extends Weakness

Canadian dollar surges sharply today, boosted by stronger than expected inflation as well as retail sales. Headline CPI moderated from 1.9% yoy to 1.6% yoy in February, above expectation of 1.4% yoy. More importantly core CPI surprised the markets by accelerating from 2.0% to 2.1%. While BoC reiterated the conditional commitment to keep rates unchanged at 0.5% till of Q2, the data triggered speculation that BoC would be forced to normalize rates sooner than expected. The Loonie is additionally boosted by stronger than expected retail sales which rose 1.8% mom in January with ex-auto sales up 0.7%.

On the other hand, Euro remains under much pressure over uncertainty on Greece's debt problem. German Chancellor Merkel's spokesman Wilhelm said today that the German government "hasn't ruled out state assistance from the IMF." Also there were talk that German government has the concern that signing up to official plans to help Greece would violate a "no bail-out" clause in EU rules on the euro and expose it to legal challenges before Germany's highest court. EURCHF had another sharp fall today to as low as 1.4318, just inch above 2008 low of 1.4315.

Also, note that Euro is also weak against commodity currencies, which are so far very resilient against dollar and yen. EUR/CAD had another sharp fall today and reached as low as 1.3629 and already broke mentioned medium term target of 100% projection of 1.7499 to 1.5183 from 1.6006. Further fall should now be seen to challenge 2007 low of 1.3285.

Another point to note that AUD/CAD has broken near term support 0.9253 today. Recent consolidation that started from 0.9197 in December is possibly near to complete and we'd anticipate a break of 0.9197 support soon. Whole fall from 0.9912 is expected to extend to 38.2% retracement of 0.7164 to 0.9912 at 0.8862. That is, we maintain out view that Canadian dollar should out perform Australian dollar in short to medium term.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.0104; (P) 1.0123; (R1) 1.0158; More.

USD/CAD's fall resumed after recover was limited at 1.0187 and dropped sharply to as low as 1.0062 so far in early US session. Current decline is still expected to target 161.8% projection of 1.0779 to 1.0369 from 1.0679 at 1.0016 next, which is close to parity. On the upside, though, break of 1.0187 resistance will suggest that a short term bottom is formed with bullish convergence condition in 4 hours MACD. In such case, stronger rebound should be seen towards 1.0369 support turned resistance.

In the bigger picture, the strong break of 1.0205 support (2009 low) confirms that whole down trend from 2009 high of 1.2063 is still in progress and has resumed. Next medium term target will be 100% projection of 1.3063 to 1.0784 from 1.1723 at 0.9444. We'll now stay medium term bearish as long as 1.0779 resistance holds.

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