Canadian Dollar – Economy Strengthening – Parity on the

The picture for Canada didn’t look so bright earlier in the year, but it has since improved quite impressively in quite a few parameters.

The loonie recovered from the lows, and it could challenge parity in April, especially as inflation numbers challenge the recent dovishness of the BOC.

* This article is part of the April 2013 monthly forex report. You can download the full report by joining the newsletter in the form below.

Update: the disappointing jobs report for March made parity a tough task.

• The Canadian economy ended 2012 with a squeeze in its economy: 0.2%. Also retail sales figures pointed to a serious slowdown. The picture brightened in early March when Canada reported a gain of 50.7K jobs in February and a small deficit in its trade balance.
• GDP: The growth rate of 0.2% in January 2013 exceeded expectations. Canada reports its GDP on a monthly basis, and the peek into Q1 is certainly encouraging.
• Inflation: Stronger inflation isn’t that good for the citizens, but it is a positive for the local currency. CPI leaped by 1.2% in February and core CPI (which central banks follow closely), rose by 0.8% instead of 0.3%.
• Oil: After falling to a bottom in early March, oil prices are on the march once again, even if they remain shy of $100.

This doesn’t imply a rate hike anytime soon: the current governor Mark Carney ends his term at the end of May and isn’t expected to make any big decisions until then.

In addition, this rise in inflation could certainly be a one-off event that does not reflect any big change. But what it can do in the shorter term is change the language of the BOC and push the loonie higher.

The Bank of Canada traditionally had a relatively hawkish stance. It already made one round of rate hikes since the global financial crisis, and currently keeps the main rate at 1%, not close to 0% like in the US or Switzerland and above the 0.5% in the UK or 0.75% in the euro-zone.

Loonie traders will want to see if the figures in March were special, or a beginning of a trend. In particular: the employment data on April 5^th and CPI on April 19^th will be watched.

The BOC could be cautious regarding inflation in the April 17^th meeting, as the leap in February will not necessarily be a trend at the time of the meeting.

All in all, the Canadian economy is doing well, enjoying the stronger US demand and currently not suffering too much from housing sector issues.