C$ Up Moderately On General USD Decline
The Canadian dollar is moderately stronger Friday morning as it benefits from a bout of broadly based weakness in the U.S. dollar.
Canadian bonds are lower along with U.S. Treasurys after somewhat stronger-than-expected consumer price data in that country.
The U.S. dollar was trading at C$1.1744 at 9:54 a.m. EDT (1354 GMT), from C$1.1746 at 8:00 a.m. EDT (1200 GMT), and from C$1.1768 late Thursday.
With no Canadian data releases or other market-moving developments Friday morning, the impetus for the U.S. dollar’s decline against its Canadian counterpart come from the U.S. unit’s broad retreat in foreign exchange markets, analysts said.
“In terms of Canada, there’s really not to much happening today, with the data calendar being empty today,” said David Powell, currency analyst at IDEAGlobal in New York.
“Really, dollar/CAD is just being pressured by the across-the-board dollar losses, which are really the result of Asian reaction to negative U.S. news yesterday in the form of regional manufacturing surveys,” he said.
The U.S./Canadian dollar pair is likely to remain confined to established trading ranges in the near term, Powell said.
“I actually think that dollar/CAD is going to continue to be stuck in this range it’s been in,” he said.
On a longer-term view, the Canadian dollar is likely to appreciate, as the market is incorrectly pricing in an interest-rate easing from the Bank of Canada that is not consistent with the current economic environment in Canada, Powell said.
“It’s a bit too pessimistic on the Canadian interest rate picture in that growth is staring to pick up in Canada, as we’ve seen recently, and inflation is still a tick above the Bank of Canada’s target,” he said.
The medium term appreciation of the Canadian dollar will likely be more pronounced in cross treating against non-U.S. currencies, since markets are also incorrectly pricing in monetary easing in the U.S., he added.
On Monday, Canada’s federal government will release its budget for the 2007-08 fiscal year.
A report from RBC Capital Markets said it expects the budget to be mildly expansionary and to offer tax cuts and increase government spending.
“The Federal Budget is unlikely to impact USD/CAD significantly, although it could see BAX futures price out the interest rate cut that is partly discounted in 2007,” the report said.
The currency will also likely shrug off political risk stemming from a potential federal election and the Quebec election on March 26, the report said.
“Despite these risks, USD/CAD is more likely to be driven by the US slowdown and we continue to target 1.21 over the next 3 months,” the report said. “The Quebec Election on March 26 is shaping up to be a tight three-way race that could result in a minority Liberal government. But the result is unlikely to trigger an early Spring federal election,” it said.
“Technically, with an intermediate uptrend still in place, pullbacks to support at C$1.1590 and C$1.1427 are viewed as a new, optimal buying opportunity for an attempt at a more sustained break above C$1.1798,” it said.
Canadian bonds are lower along with U.S. Treasurys after news that the U.S. consumer price index edged up by 0.4%.
Economists had been expecting a 0.3% rise. The core CPI number, however, rose by 0.2%, as expected, after rising 0.3% last month.
The impact of the data was fairly mild, with U.S. Treasurys recovering some of the lost ground, and the Canadian bonds underperforming their U.S. counterparts somewhat.
The benchmark 10-year bond is yielding 4.04%, from 4.01% Thursday.