Canadian dollar – Canadian economy to benefit from an improving US economy

by: Roy Teo

The CAD received a boost last week due to better than expected economic data releases, higher oil prices and an improvement in risk sentiment. Housing starts in May rose to the highest level since November 2012 with house prices in April rising 0.2% mom, the strongest mom increase since May 2012. Both sets of data have reignited market speculation that monetary policy may need to be tightened earlier than expected. This supported the CAD. We believe that macro prudential tools will continue to be administered to stabilise the housing market and hence monetary policy is unlikely to be tightened till late 2014. This week, inflation and retail sales are expected to rebound from previous month. This is likely to fuel further strength in the CAD towards 1.01 against the USD. We believe the Canadian economy is likely to benefit from an improving US economy and this should support the CAD towards parity against the USD later this year.