Inflation in Canada, as measured by the change in the Consumer Price Index (CPI), declined to 3.8% on a yearly basis in September from 4% in August. This reading came in below the market expectation of 4%.
Developing story, please refresh the page for updates.
This section below was published as a preview of Canada Consumer Price Index data at 08:00 GMT.
- The Canadian Consumer Price Index is foreseen at 4% YoY in September.
- Bank of Canada Core CPI has been on the rise, although 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 foreseen to increase 4% YoY, the same pace it rose in August. On a monthly basis, price pressures are seen up by 0.1%, declining from the previous 0.4% increase.
Additionally, the Bank of Canada (BoC) will publish the Consumer Price Index Core, which excludes the most volatile components such as food and energy prices. In August, the annual BoC core CPI increased by 0.1% MoM and 3.3% YoY. As usual, the figures will be closely watched for the Canadian Dollar (CAD) potential direction.
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%, surpassing the market’s estimates of a 0.2% increase.
What to expect from Canada’s inflation rate?
The BoC has battled skyrocketing inflation by hiking the policy rate to the current 5%, the highest in over two decades. Still, policymakers held the key interest rate steady when they met in September amid signs of a weakening economy.
Nevertheless, the central bank’s statement showed policymakers will monitor incoming economic data and assess whether rates need to rise further, wary of indicating the end of the tightening cycle. Additionally, the statement read: “They [policymakers] agreed that they did not want to raise expectations of a near-term reduction in interest rates.”
Finally, the BoC reiterated it is concerned that underlying inflation is not moving down fast enough. In fact, core measures of inflation accelerated last month, as it happened in other major economies.
With that in mind, higher-than-anticipated readings for September could fuel speculation the BoC may opt for another rate hike in the near future.
Speaking at the International Monetary Fund (IMF) over the weekend, BoC Governor Tiff Macklem expressed concerns about geopolitical unrest in the Middle East affecting inflationary levels. He also noted that the fight against inflation “is not over,” although he added he is not expecting a recession. Finally, and opposing his American counterparts, he said that surging bond yields may not be a substitute for further rate hikes.
How could the Consumer Price Index data affect USD/CAD?
Usually, mounting inflationary pressures tend to boost the local currency as it suggests the central bank will turn more hawkish. However, the BoC, like most of its counterparts, has been extremely aggressive for roughly a year and a half in an effort to bring inflation down from the multi-decade highs achieved in mid-2022. And despite Governor Macklem’s words, fears of a recession pend over all economies amid the truculent monetary tightening.
Last week, the US Dollar soared after the local CPI rose by more than anticipated amid risk-off flows. With that in mind, USD/CAD may edge lower if Canadian inflation figures come in much higher than anticipated, suggesting the BoC will need to act more.
USD/CAD bottomed for 2023 at 1.3092 in July, recovering afterwards to reach 1.3785 in early October. The pair trades a handful of pips above the 1.3600 mark heading into the release of the Consumer Price Index, easing amid decreased demand for safety.
The Canadian Dollar advances against its American counterpart for a second consecutive day, although the technical picture is far from bearish. USD/CAD daily chart shows a bullish 20-day Simple Moving Average (SMA) advancing well above directionless 100-day and 200-day SMAs. At the same time, technical indicators have lost their bullish momentum but hold above their midlines, limiting the scope for a bearish run.
USD/CAD established a minimum of 1.3568 in the previous week, and sellers will likely become more courageous on a break below the level. The next relevant support area comes at around 1.3520, a potential downward target should the CAD surge with the news.
On the upside, bulls will likely retake control of the pair if it runs past 1.3700. An intermediate resistance can be found at around 1.3750, en route to the aforementioned 1.3785 multi-month high 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, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. 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) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge 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 sentiment surveys can all 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 may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
