Preview – Canadian CPI Critical For CAD

Over the last 10 days, the Canadian Dollar (CAD) has dropped a whopping 8.5% against is US namesake and importantly, the CAD dropped against all the major currencies by varying %age in the same period. This is in sharp contrast to the trend, which was seen in the first 10 months in 2007, where the CAD had an unprecedented 24% against the USD.

That sharp appreciation in the CAD now seems to be starting to show up in fundamentals for the CAD, which may result in some of those gains taken away. The CPI today and Retail Sales numbers tomorrow may result in a swing in markets expectations of an interest rate change from the BOC at its next meet on 04-Dec. Sharply negative numbers for both are likely to result in an ultra-dovish statement, if not an interest rate cut itself.

Currently, the CPI m/m for October is expected at 0.1%, down from 0.2% seen last month. The Core CPI m/m is expected at 0.1%, down from 0.4% last month. The most important number however, the BOC Core Inflation Index Y/Y is expected at 2.0%, unchanged from 2.0% last month, at its lowest since Aug-06. See the chart below with the expected number in Red.

Any number above 2.0% for the BOC Core Inflation Index would be an upward surprise and is likely to be greeted with immediate selling on USD-CAD. On the other hand, a number below 1.9% would see USD-CAD rally, as the speculation of a rate cut from the BOC would increase. An immediate sharp move expected from the release of the data, would make short term trading extremely tricky. Hence, short term trades should be done after looking at the numbers.

Technically USD-CAD seems to have bottomed out at 0.9068, which is likely to hold for atleast 2-3 months, if not more. As such, the short term trend for the pair is bullish, and dips are likely to find buying while it trades above 0.9400. The immediate Resistance is at 1.0000. A rally above that could lead to further year end short covering - profit taking from longer term players, which could result in a rally towards 1.0200. However, the latter would require fundamental backing as well to sustain. Nevertheless, the near term bias for the pair is bullish, and buying dips should be considered while above 0.9400.