- The Canadian Consumer Price Index is forecast to rise 3.3% YoY in January.
- Canada’s CPI inflation data is set to impact the timing of a Bank of Canada rate cut.
- Statistics Canada will publish the CPI inflation data on Tuesday.
The high-impact Consumer Price Index (CPI) data from Canada will be published by Statistics Canada on Tuesday at 13:30 GMT. The CPI inflation data is likely to have a significant influence on the market’s pricing of an expected Bank of Canada (BoC) interest rate cut this year, impacting the value of the Canadian Dollar.
What to expect from Canada’s inflation rate?
Economists expect the Canadian CPI to rise at an annual rate of 3.3% in January, slowing from a 3.4% growth recorded in December. On a monthly basis, the CPI inflation is seen rebounding to 0.4% in the same period after December’s 0.3% decline. The Core CPI rose 0.1% MoM in December.
Alongside the CPI data, the Bank of Canada (BoC) will publish its closely watched Core Consumer Price Index data, which excludes volatile items such as food and energy prices. In December, the annual BoC Core CPI rose 2.6% while the monthly BoC Core CPI dropped 0.5%.
The expected slowdown in the headline annual Canadian CPI inflation could be attributed to lower energy and food prices. However, core CPI figures are likely to remain sticky, in the face of the BoC’s higher borrowing costs, which have led to rising mortgage interest costs and rents.
Previewing the Canadian inflation report, analysts at TD Securities (TDS) noted: “We look for headline CPI to fall 0.2pp to 3.2% y/y in Jan as prices rise by 0.4% m/m, but details should reinforce limited progress. Food/energy components will drive most of the deceleration as 3m rates of core CPI accelerate from Dec. That should result in a mixed tone overall and the persistence in underlying inflation sets a high bar for any dovish shift from the BoC in March.”
According to Canada’s overnight index swaps (OIS) curve, a first-rate cut by the BoC is likely seen in July.
Bank of Canada Governor Tiff Macklem, at the Montreal Council on Foreign Relations event last week, said that “the policy discussion is shifting from whether or not the policy is restrictive enough to how long it should remain restrictive.”
“The path back to 2.0% inflation is likely to be slow,” Mackem said, warning that “risks remain, as shelter prices are now the biggest contributor to above-target inflation.”
How could the Canada CPI data affect USD/CAD?
The Canadian Dollar is consolidating its recovery from two-month lows of 1.3586 against the US Dollar heading toward Tuesday’s CPI showdown. Hot inflation data from the United States helped the US Dollar gain some ground last week but growing expectations of delayed US Federal Reserve (Fed) rate cuts capped the Greenback’s upside. Markets now price in a 66% chance of a June Fed rate cut, the CME Group’s FedWatch Tool shows.
The Canadian Dollar could extend its recovery if the headline and core CPI figures come in hotter-than-expected and reinforce the BoC’s narrative of “higher interest rates for longer”. In such a case, USD/CAD could revisit the 1.3400 area. In contrast, soft Canadian inflation data could bring back early BoC rate cuts bets on the table, allowing USD/CAD to resume its uptrend toward 1.3600.
Dhwani Mehta, FXStreet’s Senior Analyst offers key technical levels for trading USD/CAD on Canada’s inflation report: “USD/CAD continues to defend the horizontal 21-day Simple Moving Average (SMA) at 1.3470, as the 14-day Relative Strength Index (RSI) indicator sits above the midline.”
“If the 21-day SMA at 1.3470 holds the fort, USD/CAD could rebound to challenge the 100-day SMA at 1.3550 on its way to the two-month high of 1.3586. Further up, the 1.3600 round level will be on buyers’ radars. On the downside, daily closing below the 21-day SMA will reopen floors for a test of the 50-day SMA at 1.3410. The next relevant downside target is seen at the February low of 1.3365,” Dhwani adds.
Economic Indicator
Canada BoC Consumer Price Index Core (YoY)
The BoC Consumer Price Index Core, released by the Bank of Canada (BoC) on a monthly basis, represents changes in prices for Canadian consumers by comparing the cost of a fixed basket of goods and services. It is considered a measure of underlying inflation as it excludes eight of the most-volatile components: fruits, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity transportation and tobacco products. The YoY reading compares prices in the reference month to the same month a year earlier. Generally, a high reading is seen as bullish for the Canadian Dollar (CAD), while a low reading is seen as bearish.
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Next release: 02/20/2024 13:30:00 GMT
Frequency: Monthly
Source: Statistics Canada
Bank of Canada FAQs
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.
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