CAD Weakens As BoC Lowers Growth Forecasts

The USD has made gains against its major counterparts today as risk appetite was burdened by poor economic news and a dovish BoC statement. The headline event of the European morning was UK CPI which surged an alarming 0.6% MoM, 2.9% YoY in December; up from last month’s 0.3% MoM, 1.9% YoY rise. Although potentially suggesting higher borrowing costs may have to be implemented to ward off an overshoot in inflation, the spike is in line with the BoE’s forecasts in the Quarterly Inflation Report last November; and according to the path predicted in that scenario, inflation is expected to fall back towards target in the coming months. GBPUSD, which has rebounded strongly from its 1.5833 lows on 30th Dec, surged to 1.6459 after the release, but the rally failed to gather much momentum and the pair subsequently succumbed to the bout of USD strength, touching a low of 1.6313 before recovering somewhat to 1.6370 levels. The other major release of the morning session was Germany’s ZEW survey, which showed investor sentiment fell more than expected in January to 47.4 (49.5 expected, 50.4 prior), causing EURUSD to slump below its 200 day moving average (around 1.4293), touching lows of 1.4262. So far, the major support of 1.4250 remains intact, but a closing break below there would open up further downside to 1.4000 levels.

During the afternoon session, the markets awaited the latest BoC rate meeting, and as expected, rates were kept unchanged at 0.25%. However, the statement was distinctly dovish in tone; revising down estimates of 2009 GDP from -2.4% to -2.5%, and reducing the growth outlook in 2010 to 2.9% from 3.0% in their prior estimates. Furthermore, they repeated that the strength of the CAD could act as a “significant further drag” on growth, and added that rates could be expected to remain at 0.25% until the end of Q2 2010. In response, USDCAD rallied above the significant 1.0320 resistance to touch highs of 1.0348, and a close above the 1.0320 today would point to a further bullish correction for USDCAD.

Tonight’s release of New Zealand CPI will be an important reading for predicting the future path of interest rates taken by the RBNZ; inflation is expected remain flat on the quarter and tick up 2.1% YoY; any deviation higher would be very positive for the currency as it would likely prompt the RBNZ to shrug off any remaining vestiges of dovish sentiment. Tomorrow’s releases include UK ILO Unemployment (expected to rise to 8.0% from 7.9% currently), Canadian CPI (forecast to fall -0.2% MoM), and US PPI (expected to remain flat on the month).

AC Markets
http://www.ac-markets.com

Disclaimer: This report has been prepared by AC Markets (thereof ACM) and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Salesperson or Traders of ACM at any given time. ACM is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.