Canadian inflation printed hotter than expected rising at 1.8% rate for the month of April versus 1.7% projected. The gains in price levels were led by an increase in gasoline - a dynamic that could reverse in the month of May given the 20% decline in crude prices over the past several weeks.
Inflation ex-eight volatile items also accelerated rising to 1.9% from 1.7% the month prior. While price pressures remain contained, they are coming dangerously close to the key 2% barrier of BOC. Canadian interest rates have been at a record low level of 25bp for more than a year. Most analysts expect Canadian monetary authorities to raise rate by 25bp at the next BOC policy setting meeting on June 1.
Today's data certainly supports the bullish thesis that BOC will have to begin to curtail its ultra accommodative monetary policy soon in order to control the nascent inflationary pressures in the economy. However, the events of the past several weeks have many market participants wondering if the BOC may choose to remain stationary for a bit longer. Certainly the massive decline in oil which has plunged by more than 20% in less than a month is likely to produce a deflationary impact on Canada's consumers and cause a considerable revenue hit to the country's vital energy production sector. The BOC may be more afraid of stifling the budding economic recovery rather than stoking inflationary pressures whihc it may view as temporary.
The price action in loonie had reflected this sense of skepticism as the pair dropped only 20 points in the aftermath of the report only to rebound above the 1.0700 level. The collapse in oil prices and the rise in risk aversion has lifted USD/CAD well off it parity level lows from a month ago, and the pair may remain elevated for the foreseeable future, despite bullish Canadian economic data as traders worry about the oncoming global slowdown in growth.
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