The Canadian dollar is likely to hit further selling pressure at levels stronger than parity in the short term

The Canadian dollar was unable to sustain gains through the parity level against the US currency on Tuesday and weakened to lows beyond 1.0050 in late domestic trading. Bank of Canada Deputy Governor Kennedy stated that downside inflation risks appeared to have risen over the past few weeks. The comments will increase speculation that interest rates will be cut again and this will tend to undermine the currency in the short term.

Commodity prices will be watched closely and any renewed increase in oil prices would offer support to the local currency. Nevertheless, the currency has struggled to find support so far in 2008 and elevated risk aversion is not a supportive factor. The overall risks suggest that the Canadian dollar will find it difficult to make any significant progress in the short term with tough resistance on any advances back through parity.