Week in FX Americas – Investors Expect Better Levels To Own The Loonie

The loonie fell to a fresh seven-month low against the US, its largest trading partner, after Friday's disappointing December retail sales print (–2.1%) and a soft January inflation report (+0.1%) stoked investor concerns about the health of the Canadian economy.

Canadian core-inflation at +1%, y/y, is well below the Bank of Canada's medium term target of +2%. Along with other recent data, it's beginning to point to a prolonged soft patch for the country with the commodity sensitive currency. With inflation numbers like this there is no reason for Canadian policy makers to consider moving its policy rate anytime soon. The futures market is now pricing in a no rate change as far out as the middle of 2014.

Disappointing domestic data has convinced some of the Canadian corporates to reconsider moving some of their demand orders for the loonie, while the required dollar buyers are beginning to chase this market higher by shifting their buy...