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USD/CAD: Canadian dollar continues descent, falls below 81 cents US

H.S. Borji
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The Canadian dollar continued its descent on Thursday, falling below 81 cents US as the markets shifted their attention to CPI and retail sales while still absorbing the Bank of Canada’s shocking rate announcement.

The loonie, as the Canadian dollar is known, declined 0.36 percent to 0.8080 US after plunging more than 1.5 percent on Wednesday. Analysts expect the Canadian dollar to fall below 80 cents US in the short-run as the commodity currencies race to the bottom.

The USDCAD exchange rate rose 45 pips to 1.2375. The pair is aiming above 1.24 as the greenback continues to trade at nearly six-year highs against its Canadian counterpart. According to the daily pivot points, the USDCAD faces initial support at 1.2070 and resistance at 1.2532.

A shocking rate announcement by the Bank of Canada on Wednesday accelerated the loonie’s freefall. The central bank unexpectedly trimmed its target for the overnight rate by 25 basis points to 0.75 percent and downgraded its outlook on the economy to 2.1 percent this year. The BOC also said real GDP growth is expected to be only 1.5 percent in the first half of the year, nearly 1 full percentage point below its October forecast.

The Bank said plunging oil prices were “unambiguously negative” for the Canadian economy, suggesting that the price collapse was spreading to other parts of the country. Alberta-based oil producers have already trimmed investment plans and indicated they would reduce their workforce in response to the current situation.

Oil futures were trading slightly higher on Thursday. US crude edged up more than 50 cents to $48.31 a barrel. Global benchmark Brent crude rose 78 cents to $49.81 a barrel.

The Canadian dollar could end the week even lower as the markets brace for disappointing inflation and retail sales figures. Canada’s annual inflation rate is forecast to plunge to 1.5 percent in December, down from 2 percent a month earlier. Mon-on-month, that represents a 0.6 percent drop in consumer prices.

So-called core inflation, which strips away volatile goods such as food and energy, is forecast to rise 2.2 percent in the 12 months through December.

The Bank of Canada expects inflation to trend further below the 2 percent target as oil prices continue to fall. However, the annual inflation rate should gradually rebound over the forecast period (2015-2016).

In other data, Canadian retail sales are forecast to drop 0.2 percent in November, easing off record highs. Excluding automobiles, retail receipts are forecast to increase 0.1 percent.

Statistics Canada will report on December CPI and November retail sales at 8:30 AM EST on Friday.

In the United States, the National Association of Realtors will report on existing home sales on Friday. The sale of previously-owned homes is forecast to rise 2.4 percent in December after plunging 6.1 percent the month before.

Separately, Markit Group will release a preliminary estimate of January manufacturing PMI. The indicator is forecast to remain relatively unchanged at the start of the year.

A stronger US recovery, combined with a weaker loonie and accommodative central bank policies, should help the Canadian economy by stimulating exports. The BOC expects the output gap – the difference between the economy’s current level and full potential – to widen in the first half of 2015. The economy is expected to return to full capacity around the end of 2016.

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