Cdn. dollar falls to three-month low as CPI slows

USD/CAD is trading at 1.3580 in the North American session, up 0.10%. The Canadian dollar is under pressure and dropped to a 3-month low on Tuesday, following Canada’s CPI release.

Canada’s CPI falls to 2.8%

Canada’s inflation rate continues to head lower and fell to 2.8% y/y in February. This was lower than the January gain of 2.9% and the market estimate of 3.1% and marked the lowest reading since June 2023.
The decline in CPI was driven by a sharp drop in cellular services prices and a slowdown in food costs. Gasoline prices rose, however, which resulted in monthly CPI rising 0.3%, up from zero in January but below the market estimate of 0.6%.

Core CPI, which excludes energy and food, eased to 2.1% y/y in February, down from 2.4% in January and below the forecast of 2.3%. Monthly, core CPI was unchanged at 0.1%, compared to the forecast of 0.3%.

The Bank of Canada will be encouraged by the inflation data, and there is growing pressure on the BoC to start lowering rates as inflation falls closer to the 2% target. At the March meeting, Governor Macklem said it was “too early” to talk about rate cuts due to concern about the risk to the outlook for inflation.

The markets responded to the inflation report by increasing the odds of a quarter-point cut in June to over 75%, compared to 50% prior to the release. The BoC is expected to maintain rates at the April meeting, but investors will be on the lookout for a change in tone from the central bank, such as a signal that rate cuts are on the way.

The Federal Reserve winds up its two-day meeting today and is expected to maintain the target range of 5.25-5.5% for the benchmark rate. Investors will be focused on the ‘dot plot’, in which FOMC members indicate their expectations for rates. The last dot plot was in December, with the Fed projecting three cuts in 2024. Will we see a change at today’s meeting?

USD/CAD Technical

• USD/CAD is testing resistance at 1.3570. Above, there is resistance at 1.3610
• 1.3525 and 1.3485 are providing support

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