USD/CAD declines amid softer Greenback and mixed Canadian CPI data
- USD/CAD drifts lower as renewed US tariff threats weigh on the Greenback.
- Canadian CPI delivers mixed signals, with monthly inflation cooling but annual inflation ticking higher.
- Markets await the BoC Business Outlook Survey due later on Monday and key US data later this week.
The Canadian Dollar (CAD) trades on the front foot against the US Dollar (USD) on Tuesday, supported by a broadly weaker Greenback, while markets show a muted reaction to the latest Canadian inflation report. At the time of writing, USD/CAD trades around 1.3878, down 0.27% on the day.
Statistics Canada reported that headline Consumer Price Index (CPI) inflation fell by 0.2% MoM in December, compared with market expectations for a 0.3% decline and a 0.1% increase in November. On a yearly basis, the CPI accelerated to 2.4% in December from 2.2% in November, coming in above market forecasts.
The Bank of Canada’s (BoC) core CPI, which strips out volatile items such as food and energy, fell by 0.4% MoM in December, following a 0.1% decline in November. On an annual basis, BoC core CPI eased to 2.8% in December from 2.9% previously.
The mixed CPI data point to cooling monthly price pressure, while annual inflation remains sticky above the BoC’s 2% target. This keeps the BoC in a wait-and-see mode, with policymakers likely to hold interest rates steady in the coming months as they look for clearer signs that inflation is moving sustainably back toward target.
In the United States (US), President Donald Trump renewed tariff threats against multiple European nations over control of Greenland, denting demand for the US Dollar. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, edges lower toward the 99.00 handle after easing from over one-month highs near 99.50.
Elsewhere, steady Oil prices offer modest support to the Loonie, given Canada’s status as a major crude exporter. West Texas Intermediate (WTI) trades around $59.15, up about 0.20% on the day.
Looking ahead, US markets remain closed on Monday for Martin Luther King Jr. Day, leaving investors focused on geopolitical headlines. Attention now turns to the BoC’s Business Outlook Survey, due later in the American session. Later this week, the spotlight shifts to the US Personal Consumption Expenditures (PCE) inflation report, GDP (Q3 annualized), and Canadian Retail Sales.
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.
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