Canadian dollar dips after CPI

The Canadian dollar continues to struggle. In the North American session, USD/CAD has broken above the 1.29 level for the first time since August. The Canadian dollar has not recorded a winning day since December 7^th.

Canada’s inflation within expectations

The Canadian dollar had a muted reaction to Canada’s inflation report for November. Annual CPI climbed 4.7% y/y, unchanged from the October release and matching the consensus. The BoC Core CPI measure, the central bank’s preferred inflation indicator, slowed to 3.6% y/y as expected, down from 3.8% in October.

The inflation data didn’t help the struggling Canadian dollar. USD/CAD is up 1.34% this week and could gain more ground if the FOMC takes a hawkish pivot at today’s policy meeting. The markets are expecting some drama at the meeting, with the Fed widely expected to double the pace of its monthly taper from USD 15 billion to 30 billion. This means that the Fed’s bond purchase scheme would end in March instead of July, setting the stage for a Fed rate hike in mid-2022.

The dot plot at today’s meeting will be closely watched and could be a market-mover. The US dollar could gain ground if the dot plot indicates that three hikes are projected for 2022. On the other hand, if the dot plot indicates only two hikes, sentiment towards the US dollar will fall. The FOMC is also expected to bury the term ‘transitory inflation’ after Fed Chair Jerome Powell acknowledged last month that high inflation would last longer than previously anticipated.

Overshadowed by the FOMC meeting was the release of US Retail Sales for November. The data was soft, with the headline release rising by just o.3% m/m, shy of the 0.8% consensus and well below the 1.8% gain in October. It was a similar story for Core Retail  Sales, which was also up 0.3% and missed expectations.

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USD/CAD Technical

• • USD/CAD has support at 1.2618. Below, there is a monthly support line at 1.2477
  • The pair is testing resistance at 1.2666. Above, there is resistance at 1.2898

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