Canadian dollar dips as Canada’s inflation slides

• Canada’s inflation rate falls to 3.1%
• Fed minutes indicate rates to remain restrictive

The Canadian dollar continues to have a quiet week. In the North American session, USD/CAD is trading at 1.3723, up 0.14%.

Canada’s inflation declines to 3.1%

Canada’s inflation rate fell to 3.1% y/y in October, down sharply from 3.8% in September and below the consensus estimate of 3.2%. Monthly, inflation edged up to 0.1%, up from -0.1% in September and matching the consensus estimate. Two key core rate gauges dropped to an average of 3.55%, down from 3.8% in September.

The drop in inflation is an encouraging sign for Bank of Canada policy makers that its rate policy is working, as inflation continues to head lower. For the markets, the decline will support expectations that the current tightening cycle is done and that the central bank will trim rates in mid-2024. The inflation print has likely closed the door on further hikes, but don’t expect to hear that from anyone at the BoC, which doesn’t want to give a false impression that inflation has been beaten, as there is still more work to do to reach the 2% target.

Fed preaches caution

At the November meeting, Fed Chair Powell said in his post-meeting remarks that the Fed would have to exercise caution. Tuesday’s FOMC minutes echoed Powell’s comments and also mentioned the need to “proceed carefully”. The minutes gave no indication that members had discussed rate cuts, noting that members felt that the current policy was restrictive and pushing inflation lower. The markets have a different take and have priced in a rate cut sometime in mid-2024, with inflation falling and the US economy continuing to lose steam. The Fed will likely continue to sound hawkish and warn that rate hikes are still on the table, but is anyone listening?

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USD/CAD Technical

• USD/CAD is testing resistance at 1.3741. Above, there is resistance at 1.3776
• There is support at 1.3660 and 1.3628

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