Forex Flash: Are markets pricing in global disinflation? – UBS

FXstreet.com (Barcelona) - The recent gyrations in commodity markets are likely an over-reaction to idiosyncratic factors in the gold market. However, “there is a risk that markets are now pricing in global disinflation coupled with policy futility. Although the Canadian dollar is not a commodity bloc currency in the strictest sense as its energy exports only represent a minority of total exports, falling commodity prices is still something Canada can do without in an environment where demand for discretionary exports is already waning.” notes Research Analyst Gareth Berry at UBS.

The Bank of Canada has highlighted in its statements that due to 'persistent' supply bottlenecks, Canadian heavy crude already trades at a discount to global prices. A secular change in the commodity sector would sharply reduce export earnings and more importantly, investment expectations domestically.

Meanwhile, correction in the housing market is ongoing and the growth in consumer credit outstanding (seasonally adjusted) in January was the weakest since November 2008. Both house prices and consumer credit growth are bordering on outright contraction – another shift, which could render the BoC to change its view on the economic evolution from 'constructive' to 'troubling'.