The Canadian dollar will continue to face tough resistance on gains towards parity against the US currency

The Canadian dollar was unable to strengthen through parity against the US dollar on Thursday and weakened to lows near 1.0120 before rallying in early Europe on Friday. Volatility levels remained high with the currency retreating again to 1.0085.

Domestically, consumer prices rose 0.4% in March while there was a 0.2% core increase which pushed the annual rate down to 1.3% from 1.4%. The subdued core inflation data will reinforce expectations that the Bank of Canada can cut interest rates aggressively with a cut likely to be sanctioned next week.

The Canadian currency will gain support if risk tolerances remain higher. The Canadian dollar will also continue to gain near-term support from the elevated level of oil prices, but it likely to hit further tough resistance close to parity, especially with the risk that oil prices will correct sharply weaker in the short term.