Last week saw sharp gains for the Loonie against the pound as the commodities pegged currency surged on the back of crude oil and copper prices hitting record highs. These gains bounced back late last week however, with a heightened expectation of an interest rate cut from the BoC this week on the 22nd.

The expectation of this rate cut is underpinned by the surprising inflation data that is being seen in Canada at the moment. Inflation slowed more than expected again in last months figures; expected to be down to 1.8% it actually was shown to have slowed to 1.4%. Slow growth in vehicle sales and gasoline prices have been earmarked as the major causes of the lowest inflation levels seen since July 2005. This data is surprising in the light of other developed economies which are feeling the pinch of the credit crisis, who generally are attempting to juggle with slowing growth and raised inflation.

This will probably underpin the Loonie in the long run because cutting interest rates should allow growth to stabilise and indeed move back to healthy growth more quickly than in some economies. However the predicted 50 basis point interest rate cut will likely weaken the Loonie short term. If this is apparent on the 22nd expect the CAD GBP cross to move above 2 and stabilise there, but medium term we still expect the cross to be range bound between 1.95 and 2.05.