AUD Spikes on CPI, USDCAD Hits 1.10 Ahead of BoC

USD/CAD broke 1.10 on Tuesday, rising to a four-year high ahead of tomorrow's Bank of Canada rate decision, we look at the risks. The loonie was the laggard on the day while the pound led the way. AUDUSD soars by 100 pips in less than 30 mins following the release of stronger than expected Q4 Aussie CPI data, with Y/Y CPI at 2.7% vs exp 2.4% from prev 2.2%.

Yesterday we wrote about the difficulty in betting against the pound as the UK economy shows signs of turning higher. The strength was on full display Tuesday; after the pair slipped to 1.6400, it shot to a one-week high of 1.6485 without any meaningful fundamental underpinning.

Overall US trading was stifled by a snowstorm but the main headlines came from the IMF, which hiked US, UK, Japanese and global growth forecasts. The moves were foreshadowed and had little market impact but underscores rising economic sentiment.

One group who will have to measure the changes in sentiment is the BOJ which ends a two-day meeting today around 0400 GMT. The focus is on how officials will cushion the effect of the sales tax increase scheduled for April. Some believe the BOJ could add stimulus as soon as February. One way to signal that would be to lower the inflation forecast, which is currently at 1.3% for FY2014 and 1.9% for FY2015.

Prior to the BOJ, the focus will be on the Australia dollar, which hasn't broken down the way some analysts anticipated after hitting a three-year low on Friday. One reason is anticipation of Australian inflation data, which is only released every three months.

Rate cuts will also be the focus of the Bank of Canada decision on Wednesday with many marketwatchers predicting the BOC will shift to an explicit easing bias. If they don't it's likely because more optimism about the US economy or a rise in inflation projections due to the softer Canadian dollar. If there's no meaningful shift in rhetoric, look for a retracement in USD/CAD as the crowded long trade thins out.