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Canada shows classic signs of recovery

From January to April, Canada spewed out positive economic data like a broken fire hydrant. After topping out at 8.7%, the country’s unemployment rate fell to 8.1% during this period. Core CPI also picked up, reaching as high as 0.7% in month-on-month in March. The prospect of economic recovery helped prop up expectations for commodity demand, which also helped oil rally to an 18-month high at 86.84 USD per barrel. At the same time, USD/CAD finally hit parity for the first time since October 2008.

Euro zone’s debt problems take the spotlight again and triggers risk aversion

In the last week of April, Standard & Poor, a credit rating agency, downgraded Greece’s sovereign debt rating to junk status. Portugal also had its rating downgraded from A+ to A-. For three-months, LIBOR rates on loans also rose to 0.536%, its highest level in 11 months. The USD strengthened across the board as people became more and more concerned that euro zone’s problems aren’t over yet.

BOC begins raising rates

On June 1, 2010, the BOC finally pulled the trigger and raised rates for the first time since July 2007. It also said that it would continue to raise rates in the following weeks. The bank’s move made Canada the first G-7 nation to hike interest rates.

Speculation of QE2 leads to a massive USD sell-off across the board

U.S. economic data had not matched up to expectations, so the Fed thought about injecting another round of stimulus to the economy. The prospect of another QE program from the Fed sent traders running away from the USD, which helped USD/CAD return to parity.

Even with major theme changes playing out through the year, mostly positive for the Canadian Dollar, we didn’t see much directional movement from USD/CAD. The pair stayed within an 800 pip range as parity held solid as a floor for USD/CAD sellers. Could 2011 be the year that the Loonie sustains dominance over the Greenback? We’ll just have to wait and see…