Canada Market Update - May

02/05/2012

Currency Overview

A 2/3rds of a cent (0.4%) gain last month leaves the pound two cents (1.2%) up on the C$ for the first four months of the year. 

Central Bank Policy

Interest rates were held steady at 1% at Bank of Canada’s mid month policy meeting. There was no surprise in the decision but the accompanying statement was far more hawkish than had been anticipated. Growth and inflation forecasts were raised with the economy now expected to reach full capacity in the first half of 2013, ahead of the previously predicted Q3. The statement was explicit in noting ‘In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.’ The statement suggests Canada may be the first of the G7 nations to raise interest rates. 

Data releases

Canada was given a boost at the start of the month with a surprise 82,300 rise in employment which brought the unemployment rate down to 7.2% from 7.4%. There was a slight dip in the Ivey PMI, the first decline in five months but the index remains towards the upper end of recent ranges and comfortably in expansion territory. Following January’s net sales of Canadian securities by foreign investors, a net C$12.5 were purchased in February, the largest monthly acquisition since May 2010. Meanwhile, inflation fell to 1.9%, its lowest level since September 2010 as price pressure for food and energy softened. Retail sales in February fell 0.2% on disappointing car sales. Although sales excluding autos were up 0.5%, a downward revision to January data left the overall report looking soft.  GDP unexpectedly shrank by 0.2% in February which cooled expectations of rate hikes in the near future.

Technical Outlook
 

Back to back monthly gains for sterling for the first time since Q3 last year have helped pull the pound back above the 200 day moving average (1.5908 at the time of writing). Price really hasn’t strayed too far from this average for some time and we remain firmly within the broad 1.53/1.65 range albeit with a current upside bias. Unless or until this range gives way however, there is little to get too excited about in this market.

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