- The Canadian Consumer Price Index is forecasted to be 4% YoY in September.
- Bank of Canada Core CPI has been increasing, currently at 3.3% YoY.
- The BoC paused rate hikes after reaching 5%, the highest in 22 years.
Canada will release inflation-related data on Tuesday, October 17. Statistics Canada will publish the September Consumer Price Index (CPI), which is expected to increase by 4% YoY, the same rate as in August. On a monthly basis, price pressures are expected to rise by 0.1%, lower than the previous 0.4% increase.
Additionally, the Bank of Canada (BoC) will publish the Consumer Price Index Core, which excludes volatile components such as food and energy prices. In August, the annual BoC core CPI increased by 0.1% MoM and 3.3% YoY. These figures will be closely watched for the potential direction of the Canadian Dollar (CAD).
Inflation in Canada, as measured by the change in the CPI, rose to 4% on a yearly basis in August from 3.3% in July. On a monthly basis, the CPI rose 0.4%, higher than the market’s expectations of a 0.2% increase.
What to expect from Canada’s inflation rate?
The BoC has been combating rising inflation by raising the policy rate to the current 5%, the highest in over two decades. However, policymakers decided to keep the key interest rate steady during their September meeting due to signs of a weakening economy.
Nevertheless, the central bank will monitor incoming economic data and assess whether further rate hikes are necessary. They want to avoid raising expectations of a near-term reduction in interest rates.
The BoC is concerned that underlying inflation is not decreasing quickly enough. Core measures of inflation accelerated last month, as seen in other major economies.
If the September inflation readings are higher than expected, it could fuel speculation that the BoC may choose to hike rates again in the near future.
Speaking at the International Monetary Fund (IMF), BoC Governor Tiff Macklem expressed concerns about geopolitical unrest in the Middle East affecting inflationary levels. He also mentioned that the fight against inflation is ongoing and dismissed the idea that surging bond yields can substitute for further rate hikes.
How could the Consumer Price Index data affect USD/CAD?
Typically, mounting inflationary pressures tend to strengthen the local currency as it suggests a more hawkish stance from the central bank. However, the BoC, like most central banks, has been aggressively tightening monetary policy to bring inflation down from multi-decade highs.
Last week, the US Dollar strengthened after higher-than-expected local inflation figures. If Canadian inflation figures also come in significantly higher than anticipated, USD/CAD could decrease, indicating the need for the BoC to take additional measures.
USD/CAD reached a low of 1.3092 in July 2023, then recovered to 1.3785 in early October. The pair is currently trading just above the 1.3600 mark ahead of the release of the Consumer Price Index data, as demand for safety has decreased.
The Canadian Dollar has gained ground against its American counterpart for two consecutive days. However, the technical picture is not bearish. The daily chart for USD/CAD shows a bullish 20-day Simple Moving Average (SMA) well above the directionless 100-day and 200-day SMAs. Technical indicators have lost their bullish momentum but remain above their midlines, limiting the potential for a bearish trend.
If USD/CAD breaks below the 1.3568 level, sellers are likely to become more confident. The next significant support area is around 1.3520, which could be a downward target if the CAD strengthens with the news.
On the upside, if the pair surpasses 1.3700, the bulls are likely to regain control. There is an intermediate resistance level around 1.3750, and the next target is the previous multi-month high of 1.3785 seen in early October.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation, and the Trade Balance. Market sentiment, with risk-on being CAD-positive, and the health of the US economy, as Canada’s largest trading partner, are also important factors.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting interest rates. Higher interest rates tend to be positive for the CAD, while lower interest rates can have a negative impact. The BoC can also use quantitative easing and tightening to influence credit conditions, which can affect the CAD’s value.
The price of Oil has an immediate impact on the value of the Canadian Dollar, as it is Canada’s biggest export. If Oil prices rise, CAD tends to increase, and if Oil prices fall, CAD tends to decrease. Higher Oil prices can also lead to a positive Trade Balance, which is supportive of the CAD.
Higher inflation tends to attract more capital inflows, increasing demand for the local currency. This is the case in modern times with the relaxation of cross-border capital controls. Central banks raising interest rates to combat inflation can lead to a stronger currency.
Macroeconomic data releases, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys, can impact the Canadian Dollar. A strong economy attracts more foreign investment and may lead to higher interest rates, strengthening the currency. Weak economic data can cause the CAD to fall.
