A key US inflation indicator that the Federal Reserve uses to set policy rose 3.4% in May, the fastest increase since the early 1990s, but in line with expectations given the rapid pace of economic recovery. The lack of a surprise pushed up risk currencies like the Canadian dollar which had already been trading up on news of a large infrastructure plan in the US. This morning, the loonie is up 0.3% against the US dollar. The Canadian currency is now 2 pennies above where it troughed last week in response to the Fed’s hawkish tilt but still well below where it was prior to the Fed announcement. USD to CAD is now trading almost exactly at our short-term forecast for the end of June and with the Canada Day holiday next week and the absence of any expected news items between now and then, we expect reduced volatility in the value of the Canadian dollar between now and then.
