USD/CAD: Strong US Dollar Continues To Test 1.03 Level

 | May 21, 2013 01:50AM ET

USD/CAD remains at high levels, as the pair continues to flirt with the 1.03 line. In early North American trading, USD/CAD was trading in the high-1.02 range. The US dollar looked sharp on Friday, climbing close to one cent, as the currency took advantage of weak Canadian inflation numbers. The greenback also got a boost as the UoM Consumer Sentiment hit a six-month high. In the US, today’s sole release is a speech by FOMC member Charles Evans. The Canadian markets are closed for a holiday.

Canada released inflation data Friday, and the figures disappointed the markets. Core CPI, a key event, posted a weak gain of 0.1%, missing the estimate of 0.2%. CPI recorded its first decline since January, dropping by 0.2%. The estimate stood at 0.0%. These are the weakest inflation numbers we’ve seen since October 2009. The Bank of Canada has talked about raising interest rates (which is bullish for the Canadian dollar), but will be hard-pressed to follow through, given these low inflation levels.

The markets were treated to a host of US releases last week, and for the most part, the results disappointed. US Inflation and manufacturing numbers fell below expectations, and housing numbers were also weak. Unemployment Claims, one of the most important releases and often a market-mover, had looked impressive in recent readings. However, the key indicator couldn’t keep pace last week, as the number of new claims jumped to 360 thousand, much higher than the estimate of 332 thousand. There was some good news from Building Permits, which were up nicely. On Friday, there was some relief from UoM Consumer Sentiment which jumped from 72.3 points to 83.7 points. This was well above the estimate of 77.9 points, and points to a sharp increase in consumer confidence. However, the host of weak US numbers we saw last week will again bring into question the extent of the US recovery, which has not been able to demonstrate sustained growth and continuous positive releases.

The US Federal Reserve has not been in the spotlight recently, but that could change if the Fed modifies its current round of quantitative easing, which involves the purchase of $85 billion in assets each month. The Fed will be tempted to act if it feels that the US recovery has gained more traction, giving it some room to ease up on QE. On Thursday, John Williams, president of the Federal Reserve Bank of San Francisco, stated that the Fed could begin reducing QE this summer and terminate bond buying late in 2013. After every solid US release(which have been heavily outnumbered by weak data), speculation rises that the Fed could take action. As the QE program is dollar negative, any moves by the Fed to wind up QE would be bullish for the dollar at the expense of the euro. So traders can expect any new developments (real or rumor) regarding QE to impact on the currency markets.