A Drop In Canadian Consumer Prices Would Validate Bearish Loonie Technical Outlook

Canadian CPI is expected to fall another 0.1% to 1.0% which would be the lowest since 2004. The country’s economy may see its current recession deepen in the first quarter as global demand for natural resources dries up as the credit crunch stifles growth.

[B]Fundamental Outlook[/B]

Canadian CPI is expected to fall another 0.1% to 1.0% which would be the lowest since 2004. The country’s economy may see its current recession deepen in the first quarter as global demand for natural resources dries up as the credit crunch stifles growth. Employers cut 82,600 jobs in February as they attempt to cut costs, which has weekend consumer confidence and weigh on domestic demand. Indeed, wholesale sales fell by 4.2% which was the lowest since 2006 which may have forced retailers to cut prices. If prices fall for a fifth month it would give the BoC the scope to be aggressive with future monetary policy. The next step for the MPC may be quantitative easing with interest rates at 0.50%, as they may take their cue from other export dependent economies like Switzerland and Japan which have already begun to travel that road. Therefore, a drop in consumer prices could weigh on the “loonie” and support the longer-term bearish technical outlook. Support at 1.2628 the 61.8% Fibo of the 1.2355 – 1.3065 rally has held firm for the past four days and may be forming a base for an extended move higher for the USD/CAD.

[B]Technical Outlook [/B]

Longer term, if the USDCAD is breaking higher in an impulse as a terminal thrust from a triangle (that had been underway since October), then price needs to remain above 1.2348. The USDCAD has held the 61.8% of 1.2348-1.3068 at 1.2618.

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[I]To discuss this report contact John Rivera, Currency Analyst: [email protected][/I]