Talking Points

  • Canadian Dollar: Headline Inflation Cools, Core Prices Rise
  • Euro: EU To Propose Euro-Bond, Spain Prepares For Assistance
  • British Pound: Budget-Cutting Measures To Weigh On Growth
  • U.S. Dollar: Benefits From Risk Aversion, Inflation Tops Forecast

The Canadian dollar pared the sharp decline from the previous day even as the consumer price report missed market expectations, and the loonie may continue to appreciate throughout the North American trade as risk appetite appears to be flowing back into the currency market. Price growth in Canada increased at an annualized pace of 2.7% in July amid forecasts for a 2.8% print, while the core rate of inflation climbed 1.6% after increasing 1.3% in the previous year. The soft headline print may lead the Bank of Canada to endorse its wait-and-see approach throughout the remainder of the year, but the central bank may show an increased willingness to normalize monetary policy further as the higher rate of core inflation suggests price pressures are feeding through the real economy.

The uncertainties surrounding the economy may encourage BoC Governor Mark Carney to maintain his pledge to 'carefully consider' future rate hikes, and the recent weakness within the real economy could dampen the outlook for inflation as the central bank sees a slowing recovery. According to Credit Suisse overnight index swaps, market participants see borrowing costs in Canada falling by nearly 50bp over the next 12-months, and the near-term rebound in the USD/CAD may gather pace in the days ahead as the fundamental outlook for Canada deteriorates. In turn, we may see the dollar-loonie make another run at parity, and the exchange rate may threaten the upper bounces of the downward trending channel carried over from all the way back in 2009 as price action continues to trade above the 200-Day SMA at 0.9805.

The Euro bounced back from an overnight low of 1.4258, but the near-term outlook for the EUR/USD remains fairly bearish as the exchange rate continues to trade within a descending triangle. The single-currency regained its footing as EU economic and Monetary Affairs Commissioner Olli Rehn said the group may draft a proposal for a euro-bond, while Spain approved changes to its budget laws to permit guarantees from the European Financial Stability Facility. As European policy makers weigh alternative measures to address the sovereign debt crisis, the increased efforts should help to prop up the single-currency, but the EUR/USD may continue to give back the rebound from 1.3636 as price action continues to trade below the 78.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.4440-60. In turn, we should see the bearish pattern pan out over the near-term, and we may see the European Central Bank continue to soften its hawkish tone for monetary policy as the region faces a slowing recovery.

The British Pound pared the overnight decline to 1.6443 and the sterling may continue to retrace the decline from 1.6745 as the government takes extraordinary steps to balance the budget deficit. As public sector borrowing declines for the second time this year, the recent data certainly increases the appeal of the sterling, but the lack of fiscal support could exacerbate the slowdown in economic activity as the private sector remains weak. In turn, the Bank of England may see a greater case to expand monetary policy further, and we may see a growing shift within the MPC as the region faces a risk for a double-dip recession. As a result, speculation for further easing could sap demands for the sterling, and the GBP/USD may trade within a broad range as market participants weigh the prospects for future policy.

The U.S. dollar struggled to hold its ground on Friday, with the greenback weakening against all of its major counterparts, and the reserve currency may face additional headwinds during the North American trade as market sentiment appears to be picking up. However, with Fed officials scheduled to speak later today, the dissenting views held by central bankers may further dampen the appeal of the USD, and the committee may struggle to meet on common ground as the fundamental outlook for the world's largest economy remains clouded with high uncertainties.