Archived IMT (2010.03.22)

Bank of Canada Governor Carney to speak on Wednesday and attention will be on whether he will step up the central banks concerns about the escalating loonie. Last weeks release of Feb CPI showed a 2.1% annual rise in core CPI, surpassing the BoCs 2.0% ceiling. CPI would still be 1.9% after removing Olympics-related items such as travel and accommodation. The usually hawkish central bank is expected to raise rates in July by 0.25% to 0.50%, a possibility that is already priced in the rising CAD. Will the BoC agree with the Fed on rate hike by both central banks this summer in order to prevent any overshoot in the loonie? Only a combination of jawboning from the Canadian officials and risk a version would limit the loonies rise. Disappointing Canadian data would be more effective in reversing CAD. But considering the improved conditions in Canadian financial markets and rising inflation, we expect any CAD pullback to be temporary. USDCAD seen capped at 1.07 and gradual declines in AUDCAD towards 0.85 later in Q2. Exercise care when shorting CADJPY. 86.80 remains viable for the week.