Canadian dollar breaks nine-day slide as CPI falls

The Canadian dollar is showing limited movement on Wednesday. In the European session, USD/CAD is trading at 1.3786 at the time of writing, up 0.09%. The Canadian dollar finally ended a nasty nine-day slide on Tuesday, posting slight gains after Canada’s CPI report.

Canada’s inflation rate falls to 1.6%

Canada’s inflation rate continued on its downward path and fell to 1.6% y/y in September, down from 2% in August and below the market estimate of 1.8.%. This marked the lowest inflation level since February 2021. Monthly, inflation declined by 0.4%, below the August reading of -0.2% and the market estimate of -0.2%. The driver of the decline was a sharp drop in gasoline prices. The average of two Bank of Canada core inflation indicators was 2.35%, unchanged from August.

The CPI release was the last key economic report before the Bank of Canada announces its next rate decision on October 23. The BoC is poised to cut rates, but policymakers will have to make a tough choice, whether to cut by 25 or 50 basis points.

The BoC would likely prefer to trim gradually in modest 25-bps increments. The September jobs report, which was stronger than expected, reinforced a 25-bps cut at next week’s meeting. However, the better-than-expected inflation release supports the case for an oversized cut of 50 bps. Inflation is fast becoming a non-issue now that inflation is comfortably below the BoC’s target of 2% and the central bank is looking to ease rates and boost economic growth. The BoC has cut rates by 75 bps this year but the economy has been slow to respond, and a 50-bps cut would encourage stronger consumer spending.

USD/CAD Technical

• USD/CAD is putting pressure on resistance at 1.3795. Above, there is resistance at 1.3819
• 1.3750 and 1.3726 are the next support levels

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