Canadian dollar is sharply lower after BoC left rates unchanged at 1.00% and published a statement that is less hawkish than expected. BoC did raise growth projection to 2.4% in 2011 and 2.8% in 2012, which the bank described as a slightly firmer profile than had been anticipated in the October MPR. Nevertheless, the bank also pointed out the cumulative effects of the persistent strength in the Canadian dollar and Canada's poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada's current account deficit to a 20-year high.

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Meanwhile, inflation pressures remains subdued and inflation expectations remain well-anchored. BoC still expect core CPI to edge up gradually to 2% by end of 2012 when headline CPI to converge to 2% target. One again, the bank noted that further removal of policy stimulus need to be carefully considered. Data from US saw Empire state manufacturing index rose to 11.9 but was below expectation of 12.3 in January. TIC capital flows jumped sharply to 85.1b in November.

Sterling jumps sharply across the board today on much stronger than expected consumer inflation reading. Headline CPI accelerated from 3.3% yoy to 3.7% yoy in December, much stronger than consensus of 3.3% yoy. Core CPI also rose from 2.7% yoy to 2.9% yoy. The CPI reading is well above BoE's inflation target of 2-3% and will likely remain there due to January VAT hike as well as strong commodity prices. Inflation above 4% yoy in Q1 looks inevitable. Such reading is giving BoE additional pressure to remove monetary policy stimulus to guard against uncontrollable inflation. However, the bank will remain cautiously on raising rates prematurely as recovery in the UK economy remains fragile. The next main focus will be BoE minutes to be released next too see if there was anyone who joined the hawkish stance of Andrew Sentance in last meeting. Released earlier today, nationwide consumer confidence unexpectedly rose to 53 in December while RICS house price balance also improved to -39 in December. DCLG house price index rose 4.0% yoy in November.

Euro, on the other hand was boosted by news that Triple-A nations pledged to strengthen the safety net guarding against the debt crisis, including possibly stepping up the EFSF. In additional Spain successfully sold EUR 5.5b of Treasury bills, with EUR 4.5b of 12-month bills at average yield of 2.947% and EUR 1b of 18-month bills at 3.367%. Both were lower than 3.449% and 3.721% yield in prior respective auctions. German ZEW economic sentiment jumped sharply from 4.3 to 15.4 in January and current situation index rose slightly to 82.8. Eurozone ZEW economic sentiment rose sharply to 25.4. ZEW said in a press release that market experts expect the dynamic growth of the German economy to continue. Also, the currently low level of real interest rates should strengthen demand for capital equipment in Germany, while consumption should benefit from stronger job security.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 0.9850; (P) 0.9875; (R1) 0.9895; More.

Despite edging lower to 0.9836 earlier today, USD/CAD rebounded strongly in early US session. Intraday bias is flipped back to the upside after taking out 0.9900 minor resistance and further rise could now be seen towards 0.9976. Considering bullish convergence condition in 4 hours MACD, break of 0.9974 will indicate short term bottoming and bring stronger rebound through parity. On the downside, below 0.9836 will bring another fall, but USD/CAD should continue to lose downside momentum and should eventually be supported by 61.8% projection of 1.0671 to 0.9979 from 1.0207 at 0.9779 to bring a sizeable rebound.

In the bigger picture, whole medium term fall from 1.0363 (2009 high) is still in progress and such down trend should continue to 0.9709 support first and possibly further towards 2007 low of 0.9056. Nevertheless, fall from 1.3063 is still looking corrective and hence, we'd expect strong support between 0.9056/9709 to contain downside and bring another medium term rise. Though, break of 1.0851 resistance is needed to indicate medium term reversal. Otherwise, outlook will remain bearish.

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Economic Indicators Update

GMTCcyEventsActualConsensusPreviousRevised
00:01GBPNationwide Consumer Confidence Dec534445 
00:01GBPRICS House Price Balance Dec-39-44-44 
04:30JPYIndustrial Production M/M Nov F1.00%--1.00% 
04:30JPYIndustrial Production Y/Y Nov F5.80%--5.80% 
09:30GBPCPI M/M Dec1.00%0.60%0.40% 
09:30GBPCPI Y/Y Dec3.70%3.30%3.30% 
09:30GBPCore CPI Y/Y Dec2.90%2.60%2.70% 
09:30GBPRetail Price Index M/M Dec0.70%0.60%0.40% 
09:30GBPRetail Price Index Y/Y Dec4.80%4.70%4.70% 
09:30GBPDCLG UK House Prices Y/Y Nov4.00%5.90%5.50% 
10:00EURGerman ZEW (Economic Sentiment) Jan15.45.34.3 
10:00EURGerman ZEW (Current Situation) Jan82.882.782.6 
10:00EUREurozone ZEW (Economic Sentiment) Jan25.417.315.5 
13:30USDEmpire State Manufacturing Jan11.912.310.579.9
14:00CADBoC Rate Decision Jan1.00%1.00%1.00% 
14:00USDNet Long-term TIC Flows Nov85.1B46.7B27.6B 
15:00USDNAHB Housing Market Index Jan 1716