No More Interest Rate Hikes from the BOC?

Yeouch! Did you see the number on that thing? I’m referring to Canada’s consumer price index released last Tuesday! It revealed that inflation in Canada dropped back to 2% year-on-year in November from 2.4% in October.

On Tuesday, Canada released its consumer price index (CPI). The index showed that core inflation in November eased to 1.4% year-on-year. On the other hand, the headline figure dropped to 2% year-on-year from 2.4%.

Details of the CPI reveal that the unexpected rise in inflation seen in October was merely temporary, as it was mostly driven by the spike in energy prices. Now that they have normalized, inflation has also moderated.

With the inflation rate heading back to the BOC’s 2% target, and the weak domestic demand, the situation looks pretty grim for the Loonie bulls!

Aside from that disappointing inflation report, other Canadian data also reflect a slight slowdown in their economy.

For one thing, the latest GDP report came in negative as it printed a 0.1% economic contraction for September. Housing and manufacturing data are also down in the dumps, with building permits sinking by 6.5% in October and the Ivey PMI taking a nosedive from its September high of 70.5 to 57.5 in November.

However, there are still rays of hope. Recall that retail sales for October came in much better than expected, and so did the core version of the report. In fact, consumer spending in October was more than twice as much as that of the previous month.

Well, that just makes the Loonie feel all warm and fuzzy inside because, with strong retail sales, Canada’s October GDP reading could beat the consensus of a measly 0.3% uptick!

Besides, don’t forget that Canada’s unemployment rate sits at a lofty 7.6%, down from its previous 7.9% reading. That’s loads better than its North American counterpart’s 9.8% jobless rate, if you ask me! Since people tend to spend more when they aren’t worried about losing their jobs, a strong labor market hints at good growth prospects for the economy.

So, on the one hand, Canada’s got a stable jobs market, strong consumer spending, and a possible rebound in their GDP. On the other hand, it has weak inflation, a shaky housing sector, and a downturn in manufacturing. No wonder the BOC just decided to sit on its hands, keep rates on hold at 1.00%, and wait for more convincing data from Canada.

The most recent interest rate decision of the BOC has already gotten a few naysayers talking about the Loonie’s slide on the charts. Now, before we get ahead of ourselves, let’s do a quick review of how the heck inflation affects currencies.

When firms are convinced that demand for their products will be sustained, they become confident about increasing their prices. So to make sure that businessmen don’t go loco with their prices, a central bank could raise interest rates to make it more expensive for businesses to borrow, thereby making it harder for them to grow and expand.

Interest rate hikes also attract investors to park their assets in that particular country because investments will yield higher returns.

Given that the November inflation figures came in as predicted by the BOC, economic gurus aren’t keeping their hopes up for BOC Governor Mark Carney to announce a rate hike on January 18, 2011 when Canada’s hotshot central bankers meet again. Back in October, the BOC announced that it expects the inflation figure to fall around 2.1% for the rest of the year.

In fact, some of them think that we won’t see the Canada’s official cash rate increase to 1.25% until March 2011!

With that said, most forex junkies are expecting to see USD/CAD trade near the top of the range which it has been stuck in for quite a while now. If they’re right, then I guess the Loonie will have to party 2010 away from p-p-parity!