USD/CAD touches fresh 4-1/2-year highs as BoC sees loonie as still strong

The loonie, as the Canadian dollar is best known, declined to the weakest level in 4-1/2 years against its US counterpart, following BoCs statement that the currency is still strong enough, being a competitive challenge for Canadian exports.

USD/CAD reached a 4-1/2-year high at 1.1174 at 09:00 GMT, after which consolidation followed at 1.1159, adding 0.65% for the day. Support was likely to be received at January 22nd 1.0954, while resistance was to be encountered at July 17th 2009 high, 1.1198.

The loonie extended its decline against the US dollar, as Bank of Canada announced yesterday that it will keep the benchmark interest rate unchanged at 1.0%, in line with analysts expectations. BoCs benchmark interest rate hasnt been changed since September 2010. According to BoCs Governor Stephen Poloz, his next decision will depend on how the Canadian economy is going to develop in future.

“Despite depreciating in recent months, the Canadian dollar remains strong and will continue to pose competitiveness challenges for Canada’s non-commodity exports,” the bank said in its quarterly Monetary Policy Report, cited by Bloomberg.

Bank of Canada lowered its inflation forecast, as it estimated consumer prices will increase by an annualized 0.9% in the first quarter, which is below the central banks 1% to 3% target band, before increasing its pace to 1.5% in the fourth quarter.

Data tomorrow may show that the consumer prices in December rose by an annualized rate of 1.3%, which will be a 20th consecutive month of inflation below 2%. The low Canadian inflation pressured the loonie , which has lost 4.2% against its US counterpart in January.

American and Canadian monetary policies continued to diverge, which widened the interest rate advantage of the US Treasury 10-year note over a comparable Canadian counterpart to 37 basis points, the most since June 2009. The latter boosted the attractiveness of the US securities over their Canadian counterparts.

Meanwhile, greenback’s demand continued to be supported by a recent batch of overall upbeat reports, which increased bets for further cuts in Fed stimulus.

Data showed on Friday that US home construction slowed less than analysts had projected, while industrial output expanded for a fifth consecutive month. Only the consumer sentiment came at a lower-than-expected reading in January, but this was not enough to change the overall market consensus that Fed will continue tapering throughout 2014.

Overall, the reports provided support to greenback’s demand, as they favored the view that the Federal Reserve Bank may continue tapering during the year. Central bank’s policy makers said on December 18th that they will reduce monthly asset purchases to $75 billion from $85 billion, underscoring improving labor market conditions.

Later in the day the Bureau of Labor Statistics in the United States is expected to publish its weekly report on initial jobless claims, an indicator for lay-offs in the country. Experts’ projections show an increase in claims by 4 000 to 332 000 during the week ending on January 18th.

At 15:00 GMT the National Association of Realtor’s (NAR) will announce the number of existing home sales in the United States. Preliminary estimates point that sales probably increased 1.0% to the annualized 4.93 million units in December, while in November the indicator reached 4.90 million units. Better than expected figures will certainly heighten the appeal of the US dollar.

The bank will probably continue to pare stimulus by $10 billion at each policy meeting before exiting the program in December, according to a Bloomberg News survey of 41 economists, conducted on January 10th. The Federal Open Market Committee is scheduled to meet next on January 28-29.

Elsewhere, AUD/USD fell to a session low at 0.8788 at 4:00 GMT, after which consolidation followed at 0.8802, down 0.56% for the day. Support was likely to be found at January 21st low, 0.8776, while resistance was to be encountered at January 22nd high, 0.8888.