Canadian dollar yawns after inflation report

USD/CAD pushed higher earlier in the day but has pared most of those gains. In the North American session, the Canadian dollar is trading at 1.3757, up o.17%.

Canada’s CPI ticks lower

Headline inflation ticked lower to 6.9% in September, down from 7.0% in August. Still, the reading was higher than the consensus of 6.8%. Core inflation remains even more stubborn, rising to 6.0%, up from 5.8% and above the forecast of 5.6%.

The inflation report takes on added significance as the Bank of Canada meets next week, and as is the case with most major central banks, the question is not if rates will rise, but by how much. The Bank will be unhappy with core inflation rising, although I doubt this was much of a surprise for Bank policy makers, as most BoC core inflation indicators are around 6%. The takeaway from the inflation data is that there will be more support for a 75 basis point hike, as opposed to a 50bp move, with inflation remaining stubbornly high.

With the Federal Reserve possibly looking at a 75bp rate hike in November, a matching hike from the BoC will prevent the US/Canada rate differential from widening, which is good news for the Canadian dollar. The BoC’s aggressive rate tightening has pushed the economy closer to a recession, but inflation remains public enemy number one for the Bank, which means more oversize rate hikes are on the way.

In the US, the Fed’s rate tightening has led to the economy showing signs of cooling down, such as the housing market. The NAHB housing market index fell for a 10^th straight month, dropping to 38 in October, down from 43 in September.

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USD/CAD Technical

• 1.3927 and 1.4024 are the next resistance lines
• There is support at 1.3744 and 1.3647

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