Tuesday FX Brief: Oh Canada!

A sharp increase in the pace of consumer prices in Canada more than reversed Monday’s difficult session for the so-called loonie as money-market traders firmly put an interest rate increase back on the Bank of Canada’s to-do list. The U.S. dollar index fell as investors set off for work on Tuesday in better spirits after a meltdown for stocks earlier over fears that Greece would need to restructure its debt in a move that would contradict its official line.

04-19-2011 10:36 AM EDT	Current Price	Put Open Int	Weekly Change in Put Open Int	Call Open Int	Weekly Change in Call Open Int	Put/Call Open Int Ratio	30-day Historical Vol (%)	Implied Volatility (%)
Euro	1.4312	14,110	1,878	5,682	289	2.5	9.8	10.5
Yen	82.4825	4,129	199	1,990	388	2.1	18.6	11.2
Pound	1.6321	914	-551	933	-21	1.0	8.4	8.4
Canada	1.0465	2,832	-214	5,662	-256	0.5	9.5	8.3
Aussie	1.0523	5,547	-815	13,025	138	0.4	12.6	11.2
Swiss	0.8987	3,466	21	2,035	-138	1.7	12.2	10.4

Canadian dollar – Data for March showed the largest increase in the annual pace of consumer prices since September 2008 and sent the local dollar sharply higher as dealers signaled a greater likelihood of tighter monetary policy later in the year. The Canadian dollar slid on Monday as risk aversion drove down commodity prices and reached $1.0275. Today the surge in inflation put the glove on the other hand, forcing buyers to cover shorts and driving the loonie as high as $1.0450. The 1.1% jump in monthly prices in March was almost twice that expected and forced the annual pace of change to 3.3%. The Bank of Canada’s core CPI reading jumped by 0.5% to 1.7%.

The government said that all components rose in March, while (with the exception of alcohol and tobacco) all prices rose faster than in February. Food prices rose by 3.3%, caused in part by adverse weather in southern U.S. states and Mexico. Fresh fruit and vegetables rose in cost by 18.6%, while meat prices added 5%. More worrisome was the trend towards rising consumer costs outside of a 12.8% increase in energy costs. Aside from rising gasoline prices, the report showed that vehicle insurance premiums rose, as did the cost of air transport and passenger vehicles, despite a dip seen in February.

Euro – Things are somewhat more settled across the euro zone on Tuesday after Greece attracted more than three bond buyers for each of the €1.625 billion three-month bills it issued at auction. The euro rallied to $1.4317 against the dollar and added 0.4% against the yen to ¥118.15. Greek two-year yields on Monday jumped to a record by breaching 20%, as investors ditched government bonds for fear that bond holders would be hurt in the event that Greece was forced to sit down and renegotiate repayment terms.

Advance readings for euro zone PMIs painted a mixed picture for activity across the 17-nation region. The manufacturing PMI reading rose by more than expected to 57.7 while PMI services dipped to 56.9. The overall composite reading was therefore greater than forecast, increasing to 57.8. German manufacturing activity expanded while its service activity declined sharply. The euro could easily have continued its decline on today’s arguably mixed data, especially in light of a dip in the consumer confidence reading to -11.4 for April.

Aussie dollar – Asian stocks followed on from Wall Street’s poor performance and maintained a risk-averse tone as trading resumed on Tuesday. Minutes from the reserve bank’s latest meeting, at which policy was left stuck in the mud, revealed that central bankers remain sanguine over inflation. Policy makers said that not only was monetary policy currently set appropriately, but also that they were prepared to look through nearby inflationary pressures and weak growth in the aftermath of recent natural disasters affecting the country. The Australian dollar reached a session low at $1.0443 as investors continued to back away from calls for higher yields this year. The Aussie went on to break even against the dollar on the day, although it remains lower and recently traded at $1.0498.

U.S. Dollar – A mild improvement in the construction sector data helped the dollar from deeper losses on Tuesday, with the dollar index currently lower by 0.4% at 75.20. Housing starts for February were revised higher, while March data improved by 7.2% to an annual pace of 520,000 units. Building permits also rose sharply at an 11.2% pace. Permits are a forward-looking indicator of the pulse of the industry and show greater confidence in the moribund business of adding to an already unhealthy overhang.

Japanese yen – The yen stopped its recent advance and turned briefly to a loss versus the greenback in New York trading. However, the Japanese unit returned to a daily gain as pressure remained on the greenback on the back of a healthy rebound on Wall Street trading. The yen reacted overnight to a predictable decline in consumer confidence for March, while machinery orders for the same month stood almost 50% higher over on year ago. The yen remains higher at ¥82.44 per dollar.

British pound – Volatility remains the watchword for traders watching the British pound ahead of Wednesday’s MPC minutes. The release does have the capacity to shift sentiment towards the pound if members of the dovish camp show signs of relenting. However, the recent pullback for inflationary pressures may well have stolen the cream and may well dumb-down any such comments. It would be a shock if any of the hawks threw in the towel at this point. The pound jumped on the back of earlier dollar weakness to reach $1.6314 before erasing its daily gain.