- Canada’s Consumer Price Index is expected to lose further traction in August.
- The Bank of Canada has cut its policy rate by 75 basis points so far this year.
- The Canadian dollar appears to have entered a consolidation phase.
Canada is set to release the latest inflation data on Tuesday, with Statistics Canada releasing the Consumer Price Index (CPI) figures for July. Projections indicate a continuation of disinflationary trends in both the headline and core CPI.
In addition to the headline CPI data, the Bank of Canada (BoC) will release its core CPI, which excludes volatile items such as food and energy prices. In July, the BoC’s core CPI showed an increase of 0.3% from July and an increase of 1.7% over the past year. Meanwhile, the headline CPI rose 2.5% over the past 12 months, the lowest level in the past 40 months and 0.4% from the previous month.
These figures are being closely watched as they could impact the Canadian Dollar (CAD) in the near term via the Bank of Canada’s monetary policy, particularly after the Bank of Canada’s additional 25 basis point cut in its policy rate earlier this month, bringing it to 4.25%.
In the foreign exchange market, the Canadian dollar remains sidelined below 1.3600, a region that also coincides with the key 200-day SMA. The ongoing range-bound theme follows monthly peaks in the 1.3625-1.3620 band recorded on September 11.
What can we expect from Canada’s inflation rate?
Analysts expect price pressure in Canada to continue its downward trend in August, although it is still likely to remain above the Bank of Canada’s target. However, the persistence of disinflationary pressure should lead the BoC to keep its easing cycle unchanged at its upcoming meetings. It is worth remembering that the central bank has already cut its interest rate by 75 basis points since it began its easing cycle at the beginning of the year.
Following the BoC’s rate cut on September 4, Governor Tiff Macklem signaled that a 25 basis point rate cut was appropriate, although a larger cut could be considered if the economy was weaker than expected.
On inflation, BoC Governor Tiff Macklem argued in a speech to the Canada-UK Chamber of Commerce in London on Sept. 10 that global trade disruptions could make it difficult for the central bank to consistently achieve its 2% inflation target. He explained that the BoC would need to balance the risks of controlling rising prices while supporting economic growth.
Macklem noted that with globalization slowing, the cost of global goods may not decline as much as before, which could lead to increased upward pressure on inflation. He mentioned that “trade disruptions can also increase the variability of inflation,” noting the impact that supply shocks can have on prices. He added that such disruptions could result in “larger deviations of inflation from the 2% target.” Accordingly, he said the Bank of Canada is focusing on risk management to balance inflation and economic growth and is investing in efforts to better understand global supply chains.
TD Securities analysts noted, “Base effects will contribute to a sharp deceleration (0.4pp) in headline CPI along with further progress in underlying measures as softer energy prices and seasonal headwinds keep prices unchanged m/m.”
When will Canadian CPI data be released and how could it impact USD/CAD?
Canada is set to release its July CPI on Tuesday at 12:30 GMT. The reaction of the Canadian dollar will largely depend on how the data impacts expectations for the Bank of Canada’s (BoC) monetary policy. Unless the figures contain significant surprises, the BoC is anticipated to maintain its current easing approach.
The USD/CAD started the month with a decent bullish bias, hitting monthly highs around 1.3620 last week. The monthly advance so far has been supported by further depreciation of the Canadian currency, which has been losing momentum since August highs near 1.3440 against the US Dollar (USD).
Pablo Piovano, Senior Analyst at FXStreet, notes that the USD/CAD appears well supported around the critical 200-day Simple Moving Average (SMA) near 1.3590. A break below this level could trigger further weakness, potentially targeting the next support level at the August low of 1.3436 (August 28), just before the March low of 1.3419 (March 8), and the weekly low of 1.3358 (January 31).
On the upside, Pablo notes that immediate resistance lies at the September peak of 1.3622 (September 11). A break of this region could expose provisional barriers at the 55-day and 100-day SMAs of 1.3659 and 1.3664, respectively, ahead of the 2024 high of 1.3946 (August 5).
Pablo also mentioned that any significant increase in CAD volatility will likely depend on unexpected CPI results. If inflation data comes in below expectations, it could strengthen the case for another BoC rate cut at the next meeting, which could lead to a rise in USD/CAD. Conversely, if inflation exceeds expectations, the Canadian dollar could see only modest gains.
Economic indicator
Core CPI (MoM)
The CPI publishes it Banque of Canada and measures the change in prices of a representative basket of goods and services purchased by households for consumption. “Core” excludes products with high volatility, such as food and energy, to capture an accurate estimate of spending. The CPI is the main indicator for measuring inflation and changes in consumption trends.
Read more.
Latest Post:
mar ago 20, 2024 12:30
Frequency:
Monthly
Actual:
0.3%
Estimated:
–
Previous:
0.1%
Fuente:
Statistics Canada
Canadian Dollar FAQs
The key factors determining the Canadian dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of oil, Canada’s main export, the health of its economy, inflation and the trade balance, which is the difference between the value of Canadian exports and its imports. Other factors include market sentiment, i.e. whether investors are betting on riskier assets (risk-on) or looking for safe assets (risk-off), with risk-on being positive for the CAD. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian dollar.
The Bank of Canada (BoC) exerts significant influence over the Canadian dollar by setting the level of interest rates that banks can lend to each other. This influences the level of interest rates for everyone. The BoC’s main objective is to keep inflation between 1% and 3% by adjusting interest rates up or down. Relatively high interest rates are generally positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the CAD and the latter being positive for the CAD.
The price of oil is a key factor influencing the value of the Canadian dollar. Oil is Canada’s largest export, so the price of oil tends to have an immediate impact on the value of the CAD. Generally, if the price of oil rises, the CAD rises as well, as aggregate demand for the currency increases. The opposite occurs if the price of oil falls. Higher oil prices also tend to lead to a higher probability of a positive trade balance, which also supports the CAD.
Although inflation has traditionally always been considered a negative factor for a currency, as it reduces the value of money, the opposite has actually occurred in modern times, with the relaxation of cross-border capital controls. Higher inflation typically leads central banks to raise interest rates, which attracts more capital inflows from global investors looking for a lucrative place to store their money. This increases demand for the local currency, which in Canada’s case is the Canadian dollar.
The released macroeconomic data measures the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, manufacturing and services PMIs, employment and consumer confidence surveys can influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment, but it can encourage the Bank of Canada to raise interest rates, which translates into a stronger currency. However, if the economic data is weak, the CAD is likely to fall.
