Canadian dollar lower ahead of CPI data

• Canada’s inflation rate expected to rise to 3.4%
• Inflation expectations for businesses ease

The US dollar has posted gains against all of the major currencies on Tuesday. In the European session, USD/CAD is trading at 1.3494, up 0.50%.

January hasn’t been kind to the Canadian dollar, which is down 1.8% this month against the greenback and is trading at one-month lows.

Canada’s inflation expected to rise

Canada releases December CPI later today, which is expected to rise to 3.4% y/y, up from 3.1% in November. Interestingly, the US inflation report for December rose to 3.4%, up from 3.1% a month earlier. The upward spike in US inflation was driven by gasoline prices, which fell at a slower pace in December than in November. This could repeat itself in the Canadian release.

Inflation expectations are closely watched as expectations of higher inflation can translate into actual inflation following suit and moving higher. The Bank of Canada’s Business Outlook Survey, released on Monday, indicated that many firms expect prices to fall, due to weaker demand and stronger competition.

For the Bank of Canada, an easing of inflation expectations should be an encouraging sign ahead of next week’s rate decision. The BoC has kept rates on hold at 5.0% since June and the rate-tightening cycle looks to be over. The burning question is when the central bank will start to cut rates. The BoC hasn’t signalled a change in policy and is likely to hold off on any rate cuts before core inflation, currently around 3.5%, is closer to the 2% target. This could mean that the BoC maintains rates until the second half of the year.

The week got off to a good start as Canada’s manufacturing sales rebounded in November with a 1.2% gain. This followed a 2.9% decline in October and edged above the market estimate of 1.1%.

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USD/CAD Technical

• USD/CAD tested resistance at 1.3452 earlier. Above, there is resistance at 1.3499
• There is support at 1.3397 and 1.3350

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