CAD Edges Up as Inflation Soars

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The Canadian dollar has posted slight gains and has pushed USD/CAD back below the 1.25 line.

Canadian inflation hits 30-year high

Investors are getting accustomed to seeing headlines that inflation has surged to 30-year highs. First, it was US inflation, followed by the UK just this week, and now Canada has joined the club of surging inflation. In December, headline CPI rose to 4.8% y/y, in line with expectations and up from 4.7% beforehand. This was the highest print since a 5.5% gain in September 1991. Core CPI climbed to 4.0% y/y, up from 3.6% in November and much higher than the consensus of 3.5%.

The jump in inflation has raised expectations that the BoC will press the rate trigger at next week’s meeting. Inflation has now overshot the bank’s inflation target of 1% to 3% for nine straight months, and cost of living pressures are being felt by worried consumers. Higher oil prices are also contributing to inflation, so we could see even inflation rise even higher in the coming months.

A rate hike next week by the BoC is looking likely, with the markets pricing in a quarter-point hike at around 70%. Next week, the BoC is expected to revise lower its growth forecast for Q1, as Canada’s growth in Q1 is expected to be marginal. Canadian provinces have enacted strict health restrictions in order to spread the rise of Omicron, which is having a negative effect on economic activity. The Omicron factor could derail a rate hike next week, as the BoC may be reluctant to raise rates when the economy is straining under the weight of the variant.

Ahead of its policy meeting next week, the BoC will be keeping a close eye on the retail sales report on Friday. The headline reading and core retail sales are both expected to come in above 1%. If the report misses expectations, it would likely change the market pricing of a BoC rate hike – a sharp reading would cement a rate hike, while a weak release would decrease the chances of the bank raising rates

USD/CAD Technical

• There is support at 1.2434, which has held since mid-November. Below, there is support at 1.2322
•  There is resistance at 1.2678 and 1.2810