USD/CAD Rises as Canadian Inflation Eases

The dollar rose for a second day on Friday. The strengthening dollar is essentially a monetary-policy tightening, increasing the risk of a double-dip US recession and deflationary pressures. The S&P 500 fell 3.94 to 1,071.69, registering a second straight weekly fall. The USD/JPY gained modestly today but edged down for the week. The EUR/USD fell and broke its 2-month uptrend, indicating further declines. European Central Bank Governing Council member Axel Weber stated that euro-area interest rates are still appropriate and the ECB should not withdraw its emergency measures this year. The GBP/USD dropped and broke its uptrend today but closed above its important 1.55 support. The Australian dollar pared its overnight losses after finding support at its uptrend line in the 0.88 area.

The USD/CAD advanced for a second day. Canada's consumer prices grew slightly less than anticipated, reducing the possibility that the Bank of Canada will hike interest rates in the near future. The BOC is likely to maintain its 0.75% policy rate at its September 8 policy meeting. The North American economy is slowing. July Canadian inflation data showed the Canadian CPI rate at 1.8% y/y and the BOC core CPI rate at 1.6% y/y, below the central bank's 2.0% target rate. Today the USD/CAD broke its 2-month downtrend, indicating further gains. Resistance is in the 1.0650 area and support in the 1.04 area.

Financial and Economic News and Comments

US & Canada

Nevada had the highest unemployment rate among the states, 14.3% in July, the highest since records began in 1976, compared with 12.3% in July 2009, a Labor Department report showed. The states with the next highest jobless rates were Michigan, 13.1%, California, 12.3%, and Rhode Island, 11.9%. North Dakota continued to have the lowest unemployment rate, 3.6%, followed by South Dakota, 4.4%, and Nebraska, 4.7%. Meanwhile, New York's jobless rate was unchanged at 8.2% in July.

Canada's consumer prices rose 0.5% m/m in July, the third rise in four months and the most since November 2009, reflecting a new sales tax in two provinces, after a 0.1% m/m decline in June, according to CPI data from Statistics Canada. The consumer-price inflation rate accelerated to 1.8% y/y from June's 1.0% y/y. Bank of Canada core consumer prices declined 0.1% m/m for a second month in July. The BOC core CPI rate, which excludes the tax changes, unexpectedly slowed to 1.6% y/y from June's 1.7% y/y. The July numbers were fractionally lower than market expectations, prompting traders to reduce bets on BOC interest-rate increases.

Europe

European Central Bank Governing Council member Axel Weber, with his rather dovish and cautious comments, suggested that the ECB should help banks through end-of-year liquidity tensions before considering an exit from emergency lending measures in Q1 2011. “Most of these discussions about the continuation of the exit I think will be focused on the first quarter,” Weber said in an interview with Bloomberg Television, emphasizing that “it's clear that we need to re-embark on a normalization procedure.” He also stated that “since inflation risks continue to be low over the policy-relevant medium term, this does not suggest a policy tightening yet” and “rates remain appropriate.”

Asia-Pacific

Japan's convenience store sales grew 0.5% y/y on a same-store basis to ¥670.1 billion ($7.8 billion) in July, the first year-on-year gain since May 2009, led by strong sales of summer-season items such as cold drinks and ice cream, after a 1.5% y/y decline in June, figures from the Japan Franchise Association showed.

FX Strategy Update