Canadian Dollar Forecast: CAD Exchange Rate Downtrend Continues as Inflation Dips

January 25, 2015 - Written by John Cameron

STORY LINK Canadian Dollar Forecast: CAD Exchange Rate Downtrend Continues as Inflation Dips

The Canadian Dollar extended declines against both the Pound and US Dollar on Friday following the publication of Canada’s Consumer Price Index for December.

The ‘Loonie’ previously registered a three cent decline against the Pound and fell to a six-year low against the US Dollar following the Bank of Canada’s surprising decision to cut interest rates at its January gathering.

The central bank hopes to combat the impact of falling oil prices with the move. The Economist said of the decision; ‘Markets [...] quickly felt the impact of the decision.

The Canadian Dollar, which had already dropped 10% against America's currency after oil prices began to fall last June, slumped a further 2.5%; a Loonie now buys just 0.81 of a greenback. The Toronto stock market rose sharply due to the drop in financing costs for firms. The lower Canadian Dollar is also seen as a boon to exporters of non-energy goods and services. It could also lessen the pain being felt by energy exporters, whose products tend to be priced in American Dollars.’

The Canadian Dollar did stage a modest rally following the death of the Saudi Arabian King amid hopes that the nation might adjust its oil production policy, but came under further strain ahead of the publication of domestic inflation data.

The report showed a marked slowing in consumer price gains at the end of last year, with inflation advancing at the slowest pace for nine months. Given the recent plunge in oil prices, the drop in inflation was largely anticipated but it did exceed the market consensus.

Economist Derek Holt said of the report; ‘We don’t think that the relatively high core CPI number in any way deters the Bank of Canada from its current accommodative course, which is premised on the potential for economic weakness and diminished price pressure.’

Canadian Dollar losses were a little tempered as the nation’s retail sales report impressed. Sales were shown to have increased by 0.4% on the month in November rather than declining the -0.2% expected. The increase was largely due to colder-than-anticipated weather and promotions among retailers (like Black Friday). However, the Canadian Dollar prepared to close out the week trading 0.3% lower against the Pound and in the region of 0.8060 against the US Dollar.

Next week further Canadian Dollar volatility could be caused by the nation’s growth data for November. The US growth and durable goods orders data may also have an impact on the currency, as could further movement in the commodities market.

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