Candian Dollar and Data Update

Canada reported an acceleration in inflation and strong capital inflows at the end of last year. The Canadian dollar, like the other major currencies, are recovering against the US dollar in the North American morning. The US dollar approached the CAD1.05 objective noted yesterday and has turned back to retes the CAD1.04 area. Although minor penetration is possible, we are more inclined to expect continued range trading today as the hourly momentum indicators are already over-extended.

Consumer prices were 1.9% above year ago levels last month, the highest since Nov 2008, representing a 0.3% increase on the month. More importantly from a policy making point of view, the core rate rose to 2.0% from 1.5%. The Bank of Canada has promised no rate hikes before mid-year. The stickiness of core inflation warns of a risk of a BOC hike in Q3.

In terms of capital inflows, Canada reported a foreign investors bought C$11.2 bln of Canadian assets (bonds, stocks and money market) in December, which was almost twice what the consensus had forecast and caps off a record year of inflows ($109 bln). Bond demand tends to be the driver, accounting for almost 90% of the monthly inflow and around 80% of the annual inflow.

Note that some of the bonds bought by foreign investors were dollar-denominated issues by provincial governments and businesses.

Foreign investors bought C$1.2 bln of Canadian equities in December. For all off last year foreign investors bought C$26.2 bln of Canadian equities from the crisis depressed C$2.75 bln in 2008. Reports suggest the commodity and financial sectors were the main equity attractors.
Candian Dollar and Data Update Candian Dollar and Data Update Reviewed by Marc Chandler on February 18, 2010 Rating: 5
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