USD/CAD – Canadian dollar shrugs as inflation falls

• Canada’s inflation falls to 4.3%, as expected
• USD/CAD response is muted

The Canadian dollar is almost unchanged, trading at 1.3388 in North America.

Canada’s inflation falls to 4.3%

There was good news on the inflation front, as headline CPI fell to 4.3% in March, down sharply from 5.2% a month earlier and dropping to its lowest level since August 2021. The reading matched the forecast, which explained why the Canadian dollar’s response has been muted. A key component of core CPI also eased, falling from 4.8% y/y to 4.5%. The slowdown in prices was felt across the economy, led by gasoline prices, which declined by 13.8% y/y, the largest monthly decline since July 2020, according to StatsCan. Mortgage interest costs, however, jumped 26% y/y in March, as high interest rates are taking a bigger bite out of household incomes.

For the Bank of Canada, the inflation report was good news, although at the end of the day the Canadian consumer continues to see prices rising at the supermarket; the deceleration in inflation isn’t providing any relief to their pocketbooks. Inflation remains well above the 2% target, but the drop in inflation will provide support for another pause in rates at the next meeting in June. The BoC paused rates earlier this month for the first time in the current rate-tightening cycle, leaving the benchmark cash rate at 4.50%.

The BoC has projected that inflation will fall to 3% in the coming months and reach the 2% target by the end of 2024. The March inflation report shows that the BoC’s forecast isn’t just wishful thinking, as inflation continues to head lower. The BoC would like to see the robust labour market cool down, which would help lower inflation.

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USD/CAD Technical

• USD/CAD tested support at 1.3486 earlier today. Below, there is support at 1.3397
• 1.3566 and 1.3629 are the next resistance lines

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