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USD/CAD: Canadian dollar hits 3-week high as inflation reaches 2.4%

H.S. Borji
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The Canadian dollar rose to its highest level in three weeks Friday, as annual inflation continued to extend above the Bank of Canada’s target despite falling fuel prices.

The loonie, as the Canadian currency is known, climbed to an intraday high of 0.8929 US. It would subsequently consolidate at 0.8902 US, its highest level since October 31.

The USDCAD currency pair declined 0.67 percent to 1.1229. Initial support is likely found at 1.1193, which is below the 50-day exponential moving average. On the upside, resistance is ascending from 1.1355.

In economic data, Canadian consumer inflation remained above the central bank’s 2 percent target in October, as higher prices across several consumer products outweighed declining fuel costs.

Consumer prices rose at a seasonally adjusted rate of 0.1 percent in October, following a similar increase a month earlier, Statistics Canada reported today in Ottawa. Economists forecast a decline of 0.2 percent. Annual inflation spiked to 2.4 percent, the highest level since June, up from 2 percent in September. Economists forecast an increase of 2.1 percent.

So-called core inflation, which strips away volatile elements such as food and energy, increased 0.3 percent in October. That translated into a year-on-year gain of 2.3 percent, also exceeding forecasts.

Compared to October 2013, prices increased across all major components, StatsCan reported today. The gains were led by an increase in shelter and food costs, as well as larger price increases in transportation and clothing. Shelter costs advanced 2.8 percent in the 12 months to October. Food prices rose 2.8 percent annually and transportation costs increased 1.1 percent, official data showed.

October marked the seventh consecutive month annual inflation was at or above the Bank of Canada’s 2 percent target. The BOC has consistently argued that inflation has crept higher due to temporary factors such as higher energy costs earlier in the year, short-term spikes in telecommunications prices and weakness in the Canadian dollar.

The consumer price index first reached 2 percent in April, following a 1.5 percent increase in March. The April rate was the largest since April 2012. Headline CPI would spike to 2.4 percent in June before levelling off.

Canada’s surprising inflation figures are unlikely to convince policymakers the economy was moving any faster toward full capacity. The BOC expects Canada to operate below capacity for the next two years. As a result, interest rates are likely to remain at 1 percent for the foreseeable future. However, persistently high inflation, coupled with a steady firming of the domestic economy, could convince the BOC to begin normalizing monetary policy. According to several analysts, this could occur in the middle of next year.

The BOC has held its target for the overnight rate at 1 percent since October 2010.

The Canadian economy rebounded sharply in the second quarter, growing at an annual rate of 3.1 percent. However, growth has been muted in the third quarter. Real gross domestic product was essentially unchanged in July and contracted in August, a sign the world’s eleventh largest economy was facing headwinds. StatsCan will post official third quarter GDP data November 28.

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