The Canadian dollar rallies are likely to be sold into given fears over a sharper than expected deterioration in the economy.

The Canadian dollar hit tough resistance close to 1.0030 against the US dollar on Tuesday and weakened sharply in North American trading. Headline consumer prices rose 2.2% in the year to January while the core rate fell to a 30-month low of 1.4%. There was also a sharp drop in wholesale sales of 2.9% for December which reinforced expectations that the Bank of Canada will sanction a further rate reduction in March. There could be some calls for a more aggressive cut given the weak economic data over the past week.

The Canadian dollar will gain some support from initial strength in commodity prices, especially with oil back near the US$100 p/b level, although it is doubtful whether this strength will be sustainable.

The Canadian dollar will also tend to be undermined by the persistent credit-related fears, especially with fears that the US downturn will have a serious negative impact on the Canadian economy.