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Canadian dollar extends gains

H.S. Borji
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The Canadian dollar received another boost against its US counterpart Thursday, as the greenback fell further amid weak US consumer spending data.

The loonie advanced 0.1 percent to 0.9337, its highest level this year. Canada’s currency has advanced more than 3 percent over the past three months.

The loonie has advanced more than 0.6 percent since Friday, when Statistics Canada said retail revenues rose at the fastest pace in 11 months and consumer inflation soared to a multi-year high.

Canadian consumer prices advanced 2.3 percent annually in May, following a 2 percent climb the previous month. So-called core inflation, which strips away volatile elements such as food and energy, advanced 1.7 percent.

The faster than forecast rise in core prices is crucial for the Bank of Canada. The BOC at its May policy meetings said the rise in inflation was due to temporary factors such as higher energy costs. While energy costs remained elevated in May, the rise in core prices signal broader inflationary pressures in the Canadian economy.

The report further diminished the likelihood of a rate cut, which the BOC has promised to consider should the Canadian economy continue to stagnate.

The central bank has held Canada’s overnight rate at 1 percent since September 2010.

The Canadian dollar has defied speculators, who are betting against the currency in the face of ongoing policy developments in the United States. Speculators have warned the Canadian currency could fall below 90 US cents by the end of the year as the Federal Reserve eliminates record stimulus and signals for an eventual rate hike.

The Federal Reserve reduced the pace of quantitative easing to $35 billion at its June policy meetings, but downgraded its 2014 growth forecast. The majority of the Fed’s top officials also forecast long term interest rates to be slightly below the historical average of 4 percent, a sign the central bank won’t rush to raise the cost of borrowing during the recovery.

Based on the projections, economists say the first rate hike will come in the middle of 2015.

In economic data, US personal income advanced 0.4 percent in May, the Commerce Department reported today in Washington. However, personal spending rose less than forecast in May, advancing only 0.2 percent.
The slower than forecast rise in consumer spending, which is being attributed to weak healthcare spending, could prompt economists to downgrade their forecasts for second quarter growth.

The US economy contracted 2.9 percent annually in the first three months of the year, revised estimates showed on Wednesday. This marked the weakest quarter for the US economy since Q1 2009.

The economy is expected to have rebounded sharply in the second quarter. Economists are pegging second quarter growth at 3 to 4 percent annually.

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