CAD Shrugs Off Data, Euro Under Pressure after Fitch Default Rating
Aside from the German IFO report released earlier this morning, the only piece of meaningful economic data from North America was from Canada. The latest economic reports explain why the Bank of Canada has been comfortably on hold since October 2010. With consumer prices falling 0.7 percent in June, inflation is not a major threat. In fact, CPI declined by the largest amount since December 2008, leaving the annualized pace of CPI growth at 3.1 percent, down from 3.7 percent. Core prices also fell 0.6 percent, pushing the annualized pace of growth down to 1.3 percent. Even though headline inflationary pressures are well above the long term average, with core price growth below average, the Bank of Canada will be in no rush to raise interest rates even with consumer spending rising more than expected. The reason is because at 0.1 percent growth, retail sales are still anemic but the details are a bit more encouraging with spending less autos rising 0.5 percent due to stronger demand for electronics, appliances, building materials, convenience store items and shoes. Last week’s Bank of Canada monetary policy meeting provided little color on how quickly the BoC will raise interest rates. The central bank dropped the word eventually from the from their monetary policy statement. Previously the BoC said stimulus would be withdrawn “eventually” and the deliberate removal of this word suggests that the BoC is getting closer to raising interest rates. However at the same time they downgraded their growth forecast which means they are weary of the outlook for the Canadian economy and this implies that in reality, the latest economic reports do not push the BoC any closer to raising interest rates.
In Europe, Fitch became the first rating agency to assign a restricted default rating which almost immediately stripped the euro of its earlier gains. Although there was a lot of enthusiasm about yesterday’s bailout deal for Greece, the reality of the matter is that a restricted/ selected or temporary default is still a default. Even if it lasts for only a few days, some investors will be forced to reduce their exposure to European assets. Fitch is the first and not the last rating agency to cut the rating of Greek debt – so expect S&P and Moody’s to follow. The prospect of downgrades by other rating agencies could keep the EUR/USD under pressure.
Meanwhile, the debt ceiling talks in the U.S. will remain front and center. For more on how a downgrade or default could affect the U.S. dollar, read our report on USD: Downgrade vs. Default .
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