Canadian dollar falls, inflation rises

• Canada’s inflation rate rises to 3.4%

The US dollar continues to gain ground against its Canadian counterpart. In Wednesday’s European session, USD/CAD is trading at 1.3518, up 0.18%.

Canada’s inflation rate rises to 3.4%

Canada’s annual inflation rate rose in December to 3.4%, up from 3.1% in November and matched the market estimate.  Interestingly, the US inflation report for December also climbed from 3.1% to 3.4%. On a monthly basis, inflation fell 0.3%, down from a 0.1% gain in November and matching the market estimate. The downswing was mainly due to lower prices for travel and gasoline.

Core inflation also moved higher in December. Two measures of core CPI, CPI-trim and CPI-median, rose to a combined 3.6%, up sharply from an upwardly revised 2.9% in November.

The rise in inflation indicates that inflationary pressures remain persistent and it will be a challenge for the Bank of Canada to bring inflation back down to 2%. The central bank’s steep tightening has pushed inflation lower – just over a year ago inflation was at 6.3%, but the final mile, as the Fed is also experiencing, could prove to be the most difficult.

One disappointing inflation report doesn’t mean the BoC will raise interest rates but it does dampen expectations for a rate cut early in the year. The markets have pared the pricing of a rate cut in March to 33%, compared to 50% before the inflation release. The BoC will be in a cautious stance and won’t be in any rush to lower rates until it is confident that inflation is moving closer to the target.

In the US, we are also seeing caution from Fed members. Fed Governor Christopher Waller said on Tuesday that the Fed should lower rates “methodically and carefully” and that the timing and number of cuts would depend on the data. The Fed signalled in December that it would cut rates in 2024, but since then Fed members have been sounding hawkish and have pushed back against market expectations for up to six rate cuts this year, beginning in March. The markets have trimmed expectations for a March cut to 61%, down from 67% just one week ago.

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USD/CAD Technical

• USD/CAD is testing resistance at 1.3523. Above, there is resistance at 1.3552
• There is support at 1.3474 and 1.3445

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