- 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 Consumer Price Index (YoY)
The Consumer Price Index (CPI), released by Statistics Canada on a monthly basis, represents changes in prices for Canadian consumers by comparing the cost of a fixed basket of goods and services. 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.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.