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- The Canadian Consumer Price Index is seen increasing 1.8% YoY in January.
- The Bank of Canada reduced its interest rate by 25 basis points in January.
- The Canadian Dollar maintains the area of yearly highs vs. the US Dollar.
This Tuesday, Statistics Canada will unveil its latest inflation report for January, based on data from the Consumer Price Index (CPI). Early forecasts suggest that headline inflation held steady at 1.8% compared with January of last year.
In addition, the Bank of Canada (BoC) is also stepping into the spotlight with its core CPI data, which cuts out the more unpredictable items like food and energy. For a bit of context: December’s core CPI dipped by 0.3% from the previous month, though it still marked a 1.8% rise from a year earlier, while headline inflation was up by 1.8% annually and dropped 0.4% on a monthly basis.
These numbers carry the potential to impact the Canadian Dollar (CAD). The BoC’s approach to interest rates is key here. Since easing began in June 2024, the central bank has slashed its policy rate by 200 basis points, lowering it to 3.00% as of January 29.
Meanwhile, the CAD has been on a positive ride, steadily regaining value in the last couple of weeks. In fact, USD/CAD has dropped to two-month lows during last week, revisiting the 1.4150 region and extending its rejection from yearly peaks around the 1.4800 barrier recorded at the beginning of the month.
What can we expect from Canada’s inflation rate?
According to the meeting Minutes published on February 12, the rate cut of 25 basis points was driven by both concerns over tariff threats and a desire to bolster growth. Last month, the Bank of Canada noted that the persistent threat of tariffs was obscuring its forecasts with members admitting that predicting US trade policy was impossible.
Following the latest BoC gathering on January 29, Governor Tiff Macklem said that a significant increase in tariffs would initially push prices — and consequently inflation — up, noting that the lags in monetary policy meant there was little that could be done about that immediate effect. He explained that the key concern was to prevent that initial price surge from spreading to other prices and wages, which could lead to persistent inflation. He emphasised that while inflation was expected to rise, the focus would be on ensuring it eventually returned to 2%, as allowing a sustained increase would not be good for Canadians.
Previewing the data release, analysts at BBH note: “Canada highlight will be January CPI data Tuesday. Headline is expected at 1.9% y/y vs. 1.8% in December, core median is expected to remain steady at 2.4% y/y, and core trim is expected at 2.6% y/y vs. 2.5% in December. The GST/HST holiday (from December 14, 2024 to February 15, 2025) will pull down inflation in January, particularly in categories such as food services and semi-durable goods. The Bank of Canada projects headline and core CPI inflation to average 2.1% and 2.5% over Q1, respectively. The BoC has room to ease further, though at a more gradual pace because inflation has been around 2% since August. The market is pricing in 50 bp of easing over the next 12 months that would see the policy rate bottom at 2.50%”.
When is the Canada CPI data due and how could it affect USD/CAD?
Canada’s January inflation report will be published on Tuesday at 13:30 GMT, and all eyes will be on whether the data throws any curveballs. If the numbers stick to expectations, the Bank of Canada’s current rate outlook will likely stay on track.
Meanwhile, USD/CAD has been trading in a bearish trend since the beginning of the month, dropping as low as the 1.4150 zone on February 14 — the lowest level in the last couple of months. In addition, the pair retreated for the second week in a row, shedding nearly 7 cents from year-to-date highs of around 1.4800 recorded earlier in the month.
Pablo Piovano, Senior Analyst at FXStreet, believes that despite the ongoing recovery, the Canadian Dollar should remain under pressure from US Dollar dynamics and the tariffs narrative in the medium term.
“Bullish attempts should lead USD/CAD to a potential visit to the interim 55-day SMA at 1.4305, prior to the 2025 high of 1.4792 reached on February 3,” Piovano explains.
On the downside, there’s initial support around the 2025 bottom of 1.4150 (recorded on February 14), followed by the provisional 100-day SMA at 1.4090 and the key psychological threshold of 1.4000. A breach of the latter could trigger additional selling pressure. Targets would move toward the significant 200-day SMA at 1.3816, then the November low of 1.3823, and finally the September low of 1.3418, according to Piovano.
Economic Indicator
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.
Next release: Tue Feb 18, 2025 13:30
Frequency: Monthly
Consensus: –
Previous: 1.8%
Source: Statistics Canada
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.