Canadian Dollar holds steady after CPI inflation uptick
- The Canadian Dollar covered little ground on Tuesday, holding flat against the Greenback.
- Canadian CPI inflation rose in January, with core CPI metrics climbing more than expected.
- The Loonie remains hampered near key technical levels as bullish momentum evaporates.
The Canadian Dollar (CAD) traded blows with the US Dollar (USD) on Tuesday, keeping USD/CAD stead near the 1.4200 handle as Loonie traders try to hang onto their recent gains. Canadian Consumer Price Index (CPI) inflation figures came in as-expected, though there was an acceleration in Bank of Canada (BoC) core CPI metrics.
Canadian headline CPI inflation rose slightly in January, matching median market forecasts but not rising significantly enough to threaten the BoC’s current stance on rate cuts. However, core CPI inflation as tracked by the BoC also accelerated to an 11-month high, which could put pressure on the Canadian central bank to slow its pace of rate cutting through the remainder of the year.
Daily digest market movers: Canadian Dollar flatlines on mixed inflation prints
- Canada’s headline CPI inflation print rose to 1.9% YoY, matching forecasts and ticking up from the previous print of 1.8%.
- Core BoC CPI inflation accelerated to 2.1% YoY, climbing from the previous 1.8% as core prices accelerated at their fastest pace in nearly a year.
- Core BoC CPI inflation growth was almost entirely front-loaded, with January’s MoM figure rising to 0.4% from the previous -0.3% contraction.
- Rate differentials continue to matter heavily for USD/CAD, and traders will be watching for the latest Meeting Minutes from the Federal Reserve (Fed), due on Wednesday.
- Loonie markets are largely huddled around possible tariffs looming ahead. US President Donald Trump’s plans for sweeping tariffs against all of the US’ key trading allies have been kicked down the road to April, but the looming threat has hampered trending activity in currency markets.
Canadian Dollar price forecast
The Canadian Dollar continues to hang onto recently-gained ground, keeping USD/CAD pressed into neutral-to-bearish territory at the 1.4200 handle. Price action remains trapped below the 50-day Exponential Moving Average (EMA) near 1.4280, but further downside remains hampered by a general lack of bullish momentum behind the Loonie.
USD/CAD daily chart
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.
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