CAD strength still in infancy stage

The Canadian dollar continued to rally without missing a beat this week. Not only has the currency been backed by improving economic fundamentals, but now rumors that China and Russia are looking to diversify some of their reserves into CAD have added another important element of support. The news exacerbated the squeeze down in USD/CAD and EUR/CAD this week. Loonie cleared the prior lows for the week that had been sitting near 1.0535 and is now flirting with some important December lows along with an hourly trendline in the 1.0480/70 area. EUR/CAD, meanwhile, continues to plumb the depths and tested below the 1.50 barrier to the downside after opening the week about three big figures north of there. On daily closing basis, we will now focus on the 1.4840/30 zone for some potentially robust buying interest. This upside in the Canadian dollar is likely to persist as we head into 2010 and the risk is that rising inflation expectations force the Bank of Canada's hand in raising rates before that line in the sand of June 2010. An increase in rates ahead of most of the G-10 would do wonders for capital flows into Canada and likely push USD/CAD towards parity in no time.