Canada Dollar Good Buy, not Good Bye

Canada has reported stronger than expected April inflation reading and March retail sales data. The foreign exchange market remains gripped by the sovereign debt crisis in Europe and the threats to world growth, but the economic data underscores the bullish case for the Canadian dollar. When the crisis passes, I expect the Canadian dollar to be one of the strongest currencies.

The Bloomberg consensus had been for a 0.1% increase in March retail sales, and Canada reported a dramatic 2.1% increase and revised up the Feb gain to 0.8% from 0.5%. Auto and related sales were strong, but gains were broadly based. Excluding the automotive sector (autos, parts and gasoline) retail sales were up a still impressive 1.6%.

Canada CPI also defied expectations, but by nearly as much. The consensus had expected a 0.2% increase on the headline and core rate, but the government actually reported a 0.3% increase. This was enough though to bring the year-over-year core rate to 1.9%, just below the 2.0% threshold.

The recent decline in the Canadian dollar and this string of data, under normal circumstances would increase the probability of a BOC rate hike in June rather than July. However, the new threat to the world recovery, as partly reflected in the drop in commodity prices, encourage the BOC to have a wait and see attitude. The rate decision is not until June 1. If some sense of stability returns to the global capital markets and some greater visibility of what the H2 may hold, a BOC rate hike is still possible.

For medium term investors, however, the key point is that the BOC is still on track to be the first G7 country to hike rates. Canada's economic fundamentals seem solid and the recent sell-off has created new opportunities to add to Canadian dollar exposure.