Canadian dollar falls to a four-month low. What’s next

A divergence in the Canadian and US economies is increasingly evident.

Wednesday’s Bank of Canada rate decision put a June rate cut squarely on the agenda while the US CPI report released on the same day may mean the Federal Reserve doesn’t lower rates this year at all.

Canadian inflation is quickly moving towards target while US inflation is proving to be sticky. Economic performance has also diverged with the US economy defying expectations for a slowdown as Canada skids along with slow growth.

This may have something to do with it:

• US estimated deficit to GDP this year: 6.8%
• Canada est deficit to GDP this year: 1.8%
• US core CPI: +3.8% y/y
• Canada core CPI: +2.1% y/y

The currency market is increasingly paying attention, even as Canada appears to skirt the risk of further home-price declines in part due to surging immigration.

Technically, the two-day jump in USD/CAD is a breakout from weeks of consolidation around 1.3550. I expect to see continued gains to 1.3800, especially if risk aversion in broader markets remains high and oil price gains stall.

This article was written by Adam Button at www.forexlive.com.