Canadian Surprise, but Enough to Trigger Short Squeeze?

The Canadian dollar began the day at multi-year lows, following the double whammy of diverging central bank views.  The market heard Bank of Canada Governor sound dovish, while the Fed's "dot plot" and Yellen's expansion on what a "considerable period" means, took a toll on the Canadian dollar.  

On both scores, there is scope for an adjustment. The Bank of Canada's Poloz was not really signaling an increased likelihood of a rate cut and the Fed may move to "protest" the sharp backing up of money market rates in recent days.  

Today's economic reports, therefore, hit a vulnerable market.  Consumer prices were soft, as Poloz had hinted, but not as soft as the market expected.  February consumer prices rose 0.8% compared with the Bloomberg consensus of a 0.6% increase.  The year-over-year rate ticks up to 1.1% rather than the 1.0% consensus expectation.  The more important from a policy point of view, the core rate rose 0.7% on the month (consensus was 0.5%) for a 1.2% year-over-year pace, which is also slightly higher than expected.  

In addition, Canada reported a 1.3% increase in January retail sales, which is nearly twice what the market expected.  Weather appears to have added an extra element of volatility to this time series.  The December print was revised to -1.9% from -1.8%.  

The US dollar dropped quickly from around CAD1.1260 to near CAD1.1175.  However, the Canada bears are selling into the Canadian dollar bounce and appeared to have picked a retracement objective to make their stand and the greenback snapped back above the CAD1.1200 level.   A weekly close above CAD1.12 would indicate the CAD bears are still in control, while a break of CAD1.1175 would be more constructive.  

Watch the Australian dollar-Canadian dollar cross as a potential canary in the coal mine.  Hedge funds and other leveraged trend following participants have reportedly poured into this trade as one of the few trending plays this year.  The Australian dollar has appreciated by about 8.5% this year against the Canadian dollar and made new 10-month highs earlier today, before reversing.  Yesterday's low near CAD1.0130 is key.  If this can be taken out, a stronger reversal is likely.