Uncle Sam Sharpens His Skates on the Canadian Loonie

The US Dollar fell early this morning against the Canadian Dollar to 0.964, below the physiological 0.97 level. That was before Canada released its

and

figures. Canada's inflation numbers were released at 7:00 a.m. EST and the USD/CAD reversed its course. USD/CAD sharply spiked about 40 pips higher in under an hour as inflation slowed more than estimated. An hour in a half later at 8:30 a.m. EST Canada released retail sales numbers, which were lower than anticipated. This also caused the USD/CAD to spike 40 pips, to be cross-check back down to 0.97, only to score 70 pips to a session high of 0.977. This data reinforced a weak outlook for the region and the Loonie will likely continue its decline in the coming months. Bank of Canada's Governor Mark Carney said in a speech on May 16 that the inflation index will be “above 3 percent in the short term,” he reiterated that annual inflation would slow to 2 percent by mid-2012. So the Bank of Canada will likely wait and see in the second half of the year before reacting as Canadian inflation holds at 3.3% year-over-year. Traders believe Canada's benchmark interest rate will rise by 75 basis points over the next 12 months, after analyzing the Credit Suisse overnight index swaps. David Song, currency analyst at DailyFX, says "the rebound in the USD/CAD should gather pace over the near-term as the pair appears to have carved out a bottom in May. As the dollar-loonie breaks above the 100-Day moving average (0.9763) for the first time since November, the exchange rate looks poised to work its way back towards the 78.6% Fibonacci retracement from the 2007 low to the 2009 high around 0.9900, and the pair may threaten the multi-year downward trend as the central bank retains a cautious outlook for the economy."