The Canadian dollar has edged lower on Wednesday, trading at 1.3254, down 0.18%.
Canadian dollar eyes inflation
The Canadian dollar has performed well in the month of November, with gains of 2.7%. The unexpectedly soft inflation report out of the US ignited risk appetite, sending equities soaring and the US dollar sharply lower. USD/CAD is having a quiet day, but that could change in the North American session, with the release of Canada’s October inflation report.
The markets are bracing for a spike in inflation, with an estimate of 0.7% MoM, compared to 0.1% in September. Inflation hit 6.9% in September, a slight drop from 7.0% in August. The markets are expecting another 6.9% gain for October, and an unexpected reading could trigger some volatility from USD/CAD.
The Bank of Canada has tightened rates to 3.75%, which is a very aggressive rate-tightening cycle. The markets are expecting another 0.50% increase in December, and BOC Governor Macklem has borrowed the Fed script, saying that more rate hikes are needed in order to curb inflation. Like the Fed, Macklem has left open the possibility of reducing the pace of rate hikes in order to guide the economy to a soft landing and avoid a recession. A major concern for the BoC is that inflation expectations remain high, which risks triggering a wage-price spiral that would result in inflation climbing higher. A soft inflation report today would go a long way in assuaging the BoC’s concerns over inflation and inflation expectations.
The Fed is doing its best to dampen speculation that it plans to pivot in its rate policy and that the rate-hike cycle is almost completed. Fed policy makers have sounded hawkish since the inflation report sent the markets into a tizzy, as any dovish signals could hurt the Fed’s battle with high inflation. The Fed’s message remains that the fight with inflation is not over and even though there could be an easing of the pace of hikes next month, the Fed expects a higher terminal rate than it did in September.
- USD/CAD faces resistance at 1.3353 and 1.3471
- There is support at 1.3218 and 1.3136
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