The Canadian dollar has started to gain favor on the back of an improving outlook for the economy and firming oil prices. Crude prices traditionally are the main driver of “loonie” direction but we have seen that relationship wane in regards to the USD/CAD as broader greenback strength took temporary hold of the wheel. Steady improvement in Canadian fundamentals has started to raise the outlook for interest rates which may begin to grow in importance in determining future price action. Yield expectations also saw its influence over the pair dissipate over the past week as dollar appetite proved the greater force.

Canadian interest rate expectations have risen sharply following improvements in the labor market and a rise in consumer prices. The central bank is expected to remain on hold until mid-2010 but we could see them act aggressively if inflation becomes an issue. Governor Carney in a recent interview stated that their remains considerable slack in the economy and is sticking to the commitment to keep rates low. However, the central bank leader would go on to say that there are signs of stabilization in the labor market and that the housing sector is seeing strength.

U.S. interest expectations have started to stabilize as weaker than expected personal income and spending figures have tempered the outlook for future tightening. Nevertheless, the improvement in both areas reaffirms a recovery is underway which should keep the central bank on track to raise rates sometime in the second half of 2010.