Cand. dollar hits 34-month low but recovers

The Canadian dollar is having a roller-coaster week. After posting massive gains of 1.2% on Monday, the Canadian dollar fell as much a 1.4% earlier on Tuesday but has almost completely recovered. In the North American session, USD/CAD is trading at 1.4326, up 0.12% on the day.

Canada’s CPI drops to 1.8%

Canada’s inflation rate ticked lower to 1.8% y/y in December, down from the November reading of 1.9% and the market estimate of 1.9%. The annual inflation rate was the lowest since September 2024 and marked the fifth straight month that inflation remained below the Bank of Canada’s 2% target.  Monthly, CPI declined 0.4%, in line with the market estimate and well below the November reading of 0%. Gasoline prices jumped while food prices dropped sharply.

Core inflation was a mixed bag in December. The CPI Trimmed Mean, a key core inflation indicator, eased to 2.5% y/y from a revised 2.6% in November and matched the forecast of 2.5%. Monthly, core CPI rose to 1.8% from 1.6% in November and above the forecast of 1.5%.

The December CPI report indicates that the inflation picture remains positive. The Bank of Canada continues to keep an eye on inflation but with headline inflation below 2%, the BoC more focused on economic growth, and that means more rate cuts are likely on the way in order to kick-start the weak economy.

The BoC would like to deliver a series of quarter-point cuts but the Trump factor will be on the mind of BoC policymakers.  On Monday, his first day in office, Trump said that he could levy 25% tariffs on Canada and Mexico on Feb. 1. Such a move could boost inflation and delay the BoC’s plans to lower interest rates. The BoC meets on Jan. 29 and may decide to hold rates until it has a better idea of whether Trump intends to make good on his tariff threat or is his bark worse than his bite.

USD/CAD Technical

• USD/CAD tested resistance at 1.4343 and the next resistance line in 1.4444
• 1.4219 and 1.4128 are the next support levels

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