Canadian dollar shrugs as CPI declines

It has been a quiet day in the currency markets, and the Canadian dollar has followed suit. In the North American session, USD/CAD is trading at 1.3386, down 0.15%.

Canada’s inflation heads lower

Inflation in Canada slowed to 6.3% y/y in December, down from 6.8% a month earlier and matching the consensus. On monthly basis, the decline was noticeable at -0.6%, compared to 0.0% in November and the forecast of -0.1%. Core CPI fell to 5.4% y/y, down from 5.8% in November and below the forecast of 6.1%. The driver of the drop in inflation was a sharp decline in gasoline prices. Food prices, however, remain high and rose by 11% in December, a slight improvement over the November read of 11.4%. The Canadian dollar shrugged off the drop in inflation and remains close to the 1.34 round-figure mark.

The drop in inflation suggests that the Bank of Canada’s aggressive rate cycle is having the desired effect, although inflation remains much higher than the BoC’s target of 2%. The BoC holds its rate meeting next week, and the markets have priced in a 25- basis point hike, which would bring the cash rate to 4.50%. If inflation continues to downtrend, the expected hike next week could signal the end of the current rate-tightening cycle.

The BoC has said that future hikes would be determined by economic data, and there are signs of economic strength despite the rate hikes. GDP is expected to rise 1.2% y/y in Q4 and job growth sparkled in December, with over 100,000 new jobs. The markets are expecting a 25-bp hike next week, but it’s uncertain what the central bank has planned after that. The markets will be looking for clues about future rate policy from the rate statement and BoC Governor Macklem post-meeting comments.

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USD/CAD Technical

• USD/CAD is testing support at 1.3389. Below, there is support at 1.3328
• 1.3455 and 1.3546 are the next resistance lines

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